What happened

Shares of iQiyi (NASDAQ:IQ) surged on Tuesday after news broke that Tencent (OTC:TCEHY) is seeking to become the Chinese video streaming company's largest investor. By the close of trading, iQiyi's stock was up more than 25% after rising as much as 38% earlier in the day.

So what

Chinese digital payments, gaming, and social media titan Tencent reportedly reached out to Baidu (NASDAQ:BIDU) -- which owns 56% of iQiyi's stock and controls nearly 93% of its voting power -- to purchase a portion of its shares. The talks are reportedly in a preliminary phase.

Should a deal come to fruition, it would combine two of China's leading streaming services. Like iQiyi, Tencent Video has more than 100 million subscribers.

Chess piece pawns surround a chess piece king.

iQiyi stock rose sharply on Monday on reports of a potential deal with Tencent. Image source: Getty Images.

Moreover, a combination would likely allow Tencent and iQiyi to lower their streaming cost structures, which could help to boost their profitability. "A tie-up would improve their bargaining power when producing and purchasing content, and lower marketing costs that would otherwise be spent on grabbing users from each other," a source with knowledge of the potential deal told Reuters.

Now what

The online video market in China -- and many other areas of the world -- is benefiting from a coronavirus-related acceleration in the stay-at-home trend. Streaming is already a $22 billion industry in China, according to iResearch, and it should only grow larger in the years ahead. Tencent wants to control the lion's share of this rapidly expanding market -- and it's apparently willing to make aggressive moves to do so.

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