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Why Has Alibaba Acquired Youku Tudou?


Nov. 23 2015, Updated 4:13 p.m. ET

Alibaba’s acquisition of Youku Tudou

On November 6, 2015, Bloomberg Business reported that Alibaba (BABA) agreed to buy Youku Tudou (YOKU) for a total of $4.8 billion. The report states that Alibaba raised its offer price from the initial bid of $26.60 per share to $27.60 per share. The new bid was at a 35% premium to Youku’s stock price as of October 15, 2015, a day before the initial offer by Alibaba.

YoukuTudou derives its revenues primarily from video advertising inserted in the videos shown on the site and from its consumer revenues segment.

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Big entertainment players in China

Alibaba has long been trying to diversify into China’s entertainment space. In 2014, Alibaba acquired a movie studio in Hong Kong (EWH). Another Chinese player, Tencent Holdings (TCEHY) launched its movie division in 2014, which it has titled Tencent Movies+. There are other players, such as Baidu (BIDU) and Sohu.com (SOHU), that have increased their investments in China’s online video market, a subsector within the broader entertainment market.

Netflix (NFLX) is another player that is planning modest investment in China, aiming to enter the country next year. According to a January 2015 report from the China Internet Network Information Center (and as indicated in the graph above), 72% of Chinese users prefer to watch online videos on their smartphones while 71.2% of Chinese prefer laptops (rather than on home devices). This information bodes well for Alibaba because, through its acquisition, it would have access to Youku’s significant smartphone user base.

Benefits for Alibaba

Alibaba’s Chief Executive Officer, Daniel Yong Zhang, has stated that “digital products, especially video, are just as important as physical goods in e-commerce, and Youku’s high-quality video content will be a core component of Alibaba’s digital product offering in the future.” Alibaba also stated that it believes the Youku Tudou deal will complement the company’s e-commerce business as well.

More specifically, Youku offers a “buy-what-you-watch” service that lets viewers buy the clothes that the actors on a show are wearing. There is a strong possibility that with smart advertising and promotional campaigns, these viewers could turn to Alibaba’s e-commerce site for these purchases. The Youku Tudou deal, meanwhile, would also allow Alibaba to show its original content from Alibaba Pictures Group on Youku and earn revenues in the process.

You can get exposure to Alibaba by investing in the Vanguard FTSE All-World ex-US ETF (VEU), which has 2.45% exposure to the company.

Continue to the next part of this series for a look at Activision Blizzard’s latest initiatives as of November 2015.


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