Many shareholders in e-commerce firm Dangdang (NYSE:DANG) might be thinking of selling their stock after hearing about the company's latest disappointing announcement of a tie-up with Wal-Mart-backed Yhd.com. The nature of the tie-up, which will see the pair cross-promote each others' services, was a bit of a let down, especially since many had been hoping for something more substantial including an equity exchange. Dangdang had previously confirmed it would announce a tie-up after rumors of an alliance first appeared a few weeks ago. This kind of hype followed by disappointment is quite typical of Dangdang's co-founder and CEO Li Guoqing, whose fierce independence could ultimately lead to the marginalization or even death of his company.
I'm clearly not too bullish on this latest news from Dangdang, but US investors were a little more upbeat. The company's shares rose 4% in New York trading after the announcement, extending a massive rally that has seen Dangdang's stock soar 70% since it reported last week that it returned to profitability in the fourth quarter after two years of losses. Many might consider selling the stock on this latest news partly due to disappointment, but also because the recent rally is probably a bit overblown.
Let's take a closer look at the latest tie-up, which will see Dangdang open a bookstore on Yhd.com's platform, and Yhd.com open a supermarket on Dangdang's open Marketplace platform. (company announcement; Chinese article) Dangdang is certainly hyping the news, but this particular alliance doesn't seem very unusual or even cause for much excitement.
Nearly all of China's major e-commerce companies now operate open platforms in addition to their own online stores, copying the business model now used by industry leader Alibaba's wildly-popular Tmall. Such open platforms are essentially online shopping malls that allow third-party merchants to open stores on the site. Dangdang's return to profitability is due in no small part to the explosive growth of its open Marketplace, whose gross merchandise value more than doubled in the fourth quarter to nearly 1.4 billion yuan ($230 million).
It's certainly nice to see Dangdang signing up such a major new merchant to its Marketplace like Yhd.com, which also goes by the name Yihaodian and is controlled by Wal-Mart. But at the end of the day, Yhd is just one more merchant among hundreds on Dangdang's Marketplace platform, and it's hard to see why this particular tie-up has any real special meaning besides to create hype.
Master of Empty Gestures
More broadly speaking, this kind of announcement is increasingly typical of Dangdang and Li Guoqing, who also disappointed industry watchers two years ago with his formation of a similar tie-up with electronics retailing giant Gome. That tie-up also looked full of potential due to the companies' highly complementary strengths in online and offline retail, but it also ended up being mostly hype.
It's clear that consolidation is sorely needed in China's overheated e-commerce space, and there have even been some signs that such a retrenchment is coming. One of the most significant moves has Internet giant Tencent reportedly in talks to merge its e-commerce operations with JD.com, the nation's second largest e-commerce company. Dangdang is far too small to survive on its own in the longer term, and the company would be wise to form an equity tie-up or even merge with Yhd.com, which is what many were guessing when rumors of the alliance first emerged.
But this latest tie-up once again underscores that Li Guoqing has no interest in selling part or all of his company and wants to remain independent. Dangdang's recent return to profitability and the huge jump in its shares is no doubt fueling his hubris, which could ultimately lead to the company's marginalization or demise if it fails to find a stronger long-term partner.
Douglas Young has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.