Why Baidu Acquired Renren's Group-Buying Site

On Jan. 23, social network company Renren (NYSE: RENN  ) --famous for being the "Chinese Facebook"-- announced that Chinese search engine giant Baidu (NASDAQ: BIDU  ) had acquired the remaining stake of Nuomi.com, Renren's group buying site, which offers a similar service to Groupon in the world's second-largest economy. Baidu first acquired 59% of Nuomi for $160 million in 2013, as part of a strategic investment to broaden the company's operations and customer base.

By acquiring the remaining shares in Nuomi, Baidu actually does something rare, as the company is well-known for buying only controlling stakes. At the same time, by selling all of its stake in Nuomi, Renren --which has been largely overtaken by Sina's Weibo and Tencent's WeChat in the past two years-- may be trying to make its portfolio of services more compact. The social network company may focus more on improving user and monetization metrics of its promising game business, rather than releasing new services.

The plan
In the short run, the deal will probably have no impact on Baidu's financial performance. In the second quarter of 2013, Nuomi handled $120 million worth of transactions, and had 3.8 million active users. Although these are outstanding figures for a company established in 2010, its size is very small when compared against Baidu, which reported $1.453 billion in total revenue for the third quarter of 2013, a 42.3% increase from the corresponding period in 2012.

However, in the long run, Baidu may be trying to use Nuomi as the starting point in its plan to acquire some other group buying sites, like Meituan, to control the promising deals-of-the-day segment in China's e-commerce market.

The company used a similar strategy in May 2013, when it became China's largest online video platform, by acquiring online video provider PPS --a video platform commonly used in PCs-- for a $370 million premium.

Baidu merged PPS with its own video platform iQiyi --the largest online mobile video platform in China-- to form China's biggest video platform, and take the lead in a market expected to grow to 700 million users by 2017, according to research from McKinsey. Not surprisingly, iQiyi --formerly known was Qiyi-- itself was acquired from Providence Equity Partners in 2012. The company was the first online video platform in China to focus exclusively on fully licensed content. 

Going beyond traditional search business
As China's largest search engine company, Baidu gets practically all of its revenue from online marketing. The company has close to half a million active customers. Each of them spend, on average, more than $3000 per quarter in Baidu's digital ads. 

Although the business for digital ads is still growing in China thanks to an increase in mobile penetration, Baidu is aware of the need to find alternative sources of revenue. In the long run, the company wants to balance its exposure to the volatile advertising industry with other revenue-generating activities, like online streaming memberships, web analytics, and game fees. Baidu is even interested in wealth management. Together with China Asset Management Co., Baidu is launching a product that will allow users of Baidu's online payments service to use excess funds in their accounts to invest online. 

Final Foolish takeaway
Judging from Baidu's latest acquisition, it seems the next move is group-buying. It's not difficult to see why Baidu is interested in this particular e-commerce segment. China has a long history of group buying. By 2010 there were more than 1000 group-buying sites struggling to capture market share. Meituan, China's top daily deals start-up, is close to pulling in $500 million per month in sales revenue, roughly double its rate in May 2013. And after launching in 2010, competitor Lashou quickly became an important player, with an estimated market value of $1.1 billion.

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