eBay (NASDAQ:EBAY) is taking a page from Yahoo! (NASDAQ: YHOO) playbook and reaping the rewards of investing in a third party rather than only betting on building its own business locally. Yesterday, eBay invested $134 million into India's Snapdeal in a follow-on offering that comes less than a year after the company invested $50 million.
Combination of buying as well as building
According to a recent interview with Mint, one of India's leading business newspapers, Jay Lee stated that eBay India "has 5 million registered users (globally, active users are 112 million)," so why make an additional investment in a local company? Snapdeal competes with eBay, but it focuses more on businesses than individual transactions. Perhaps the opportunity is so great that it makes sense to prevent the competition from gaining an edge.
When the original investment was made last year, Amazon.com (NASDAQ:AMZN) was rumored to be competing for the same piece of the pie. Keeping Amazon from improving its position in one of the world's largest markets is worth a good deal more than the initial $50 million investment. Keep in mind, $50 million to eBay is only 1% of its operating cash flow from 2013, a small price to pay for its seat at this table.
Yahoo!'s Alibaba deal set the template
In 2005, Yahoo! paid $1 billion for a 40% stake in Alibaba in what could be one of the best investments of all time. According to Investors Business Daily, the IPO range for Alibaba is expected to be $100 billion-$150 billion when the company goes public later this year, making Yahoo!'s stake worth $40 billion-$60 billion. If this is the case, the stake in Alibaba would exceed the valuation of the parent company.
Growth is shifting to BRIC
Emerging markets such as Brazil, Russia, India, and China have seen a tremendous growth trajectory over the last five years as the U.S. markets have slowed. Established companies like MercadoLibre (NASDAQ:MELI), which focuses on Brazil, continue to see rapid 26% year-over-year revenue growth, but the potential customer base doesn't come close to the target markets of China or India. The population of Brazil at 200 million doesn't come close to that of China at 1.3 billion or India at 1.2 billion.
More deals to follow
Going forward, it is likely that we will see more deals like this. Technology is not new to incubating start-ups that run adjacent to their businesses. Over the years, Oracle has acted like a zamboni, sweeping up small software companies that come into its path. It has come to a point where venture capital deals like Snapdeal or Alibaba are a way of outsourcing operating risk to a third party so shareholders don't get burned by huge write downs.
From a financial standpoint, if the IPO range for Alibaba comes out near $100 billion, and Snapdeal can also get 1/10 that price, eBay stands to make a handsome return on its $200 million dollar investment.