Ctrip-Qunar: New Traveling Mates?

The news has been flying thick and fast few for Ctrip (NASDAQ: CTRP  ) , including the latest word that China's oldest and largest online travel agent could be headed for a merger with fast-rising rival Qunar (NASDAQ: QUNR  ) . The latest reports are saying such a deal is in late-stage talks, as Ctrip prepares to sell a controlling stake of itself to leading search engine Baidu (NASDAQ: BIDU  ) , which also happens to be Qunar's controlling stakeholder.

The sourcing in this new report is even sketchier than usual for Chinese media, but the report's appearance on the reputable Sina news website gives it a bit more credibility. According to the report, Baidu would buy control of Ctrip, then use its similar control of Qunar to merge of the pair. That would create a clear industry leader with a market value of about $10 billion, combining Ctrip's market cap of about $7 billion with Qunar's $3 billion. By comparison, eLong, the industry's only other major listed player, has a far more modest market value of just $550 million.

Ctrip has a strong ability to focus on its core travel services while adding well-conceived new products that complement that strength. For years, the company's main rival was eLong, which never seemed able to match Ctrip's performance, despite its backing by U.S. travel services giant Expedia.

But, the last two years have seen the arrival of a new field of more nimble competitors, led by names like Qunar, Tongcheng, and Tuniu. Ctrip and Qunar fought a bruising price war in the first half of last year, but tensions eased in the second half. That easing culminated in a surprising tie-up last fall that saw Ctrip start marketing some of Qunar's products, which could lead to Ctrip becoming a major strategic investor in Quanr's IPO.

More tie-up signs
Further signs emerged of a potential strategic tie-up after Ctrip raised a hefty $800 million through a convertible bond offering last fall, bringing its total cash pile to $2 billion at the end of 2014. But, no strategic investment ever came and, last week, Ctrip again surprised the market by announcing a program to buy back up to $600 million in shares. That announcement came after a brief period of weakness in Ctrip's stock, after the company became embroiled in a scandal involving compromised credit card data.

Considering the recent history, what's a person to make of the latest reports about a merger? Despite the shaky sourcing on the report, a merger makes sense and is quite likely to happen. Ctrip and Qunar have already shown they can work together, and savvy managers at both companies realize they can do much better together than separately. Having a major company like Baidu as their strategic parent must also be attractive.

The biggest danger could be regulatory scrutiny, as Ctrip and Qunar are already easily the two largest players in the online travel space. China's regulator has, so far, taken a hands-off approach to the rapidly consolidating Internet sector, and might maintain that stance if a Ctrip-Qunar deal is announced. But, if regulators oppose the deal, it could slow the recent pace of consolidation, resulting in a veto that would undermine both Ctrip and Qunar's stocks.

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