Chinese firm Tencent purchases 12 percent stake in Snap Inc.
Business

Chinese firm Tencent purchases 12 percent stake in Snap Inc.

In deciding to purchase a 12 percent holding in Snap Inc., developer of the popular smartphone application Snapchat, Tencent Holdings Limited has confused analysts and investors as to what its intentions are.

Analysts want to know what the investing holding conglomerate values in a company that has had a volatile stock price since its initial public offering, and has failed to meet investors’ growth expectations. As of now, there is not much information as to what Tencent wants to do with Snap.

Generally, a transaction of this magnitude indicates a subsequent company takeover. However, the deal’s circumstances and Tencent’s relationship with Snap instead indicates a more amicable relationship between the two companies.

As a leading technology company in China, Tencent has encouraged Snap with its long success throughout the decades. As a result of Tencent’s success and experience, it is likely that it will advise Snap in company-wide matters.

This transaction also indicates that Tencent made a passive investment in Snap and intends on holding onto its ownership for a while. If it plans on doing that, the conglomerate is more than likely to remain cautious and take actions to assist Snap.

Since its IPO in March 2017, Snap has been struggling to satisfy its investors. Tencent was one of those investors, but the conglomerate’s stake was small enough that it did not have to be disclosed according to the regulations implemented under the Securities and Exchange Commission. Snap’s stock price has fallen substantially in the past few months, but its future may be more promising after Tencent’s investment. Ryan Forbes, a Baruch College student who studies finance, has expressed his thoughts on Tencent’s actions by saying, “It’s unclear to me how Tencent will help Snapchat, not to mention the time frame in which this would happen.

However, I do know that the two companies will develop a good relationship through which both of them will benefit.”

As of now, Tencent owns 145.8 million Class A shares in Snap, but these shares are devoid of voting rights. 95 percent of the company’s voting rights are reserved for the two co-founders of Snap, Evan Spiegel and Bobby Murphy.

The pair seem to be looking forward to possibly developing a close relationship with Tencent, which the company has expressed an enthusiastic attitude toward.

Whether this relationship turns into a business partnership or not depends on the quality and amount of advice and effort that Tencent provides Snap with. If a partnership develops, the time and energy Tencent will devote to assisting Snap may mean the conglomerate could see a larger share of control in the young company and its profits.

However, uncertainty surrounds the frequent deals made between U.S. and Chinese firms. In the last five years, Chinese companies such as Tencent and Alibaba Group Holding Limited have participated in various deals to obtain ownership of U.S. companies, as they try to move cash out of the country and invest in diverse industries.  Tencent alone has completed approximately 50 similar transactions. This recent purchase of Snap shares may simply be another acquisition deal of this type.

Tencent also has stakes in companies like Tesla, Inc. and Lyft. Chinese companies are forced to go through additional screenings whenever they wish to pursue these kinds of business transactions. Their proposals are evaluated by the Committee on Foreign Investment in the United States, whose chairman is President Donald Trump.

Other members of the committee include representatives from other government agencies, such as the Department of Justice or Department of Defense.

To surmise what Tencent might have in store for Snap, one could look at some of Tencent’s products. One of the firm’s most successful products is a messaging app called WeChat, which is used by approximately 980 million users today.

The app incorporates instant messaging, video games, monetary transfers and other features that attract a diverse market. In its latest filing to the Hong Kong Stock Exchange, Tencent has impressed investors by beating their revenue expectations. The net profit in Tencent’s last quarter is $18 million, exceeding the expectations of six different analysts polled by Thomson Reuters Corporation. This success was mainly due to the conglomerate’s business division of mobile games.

The WeChat app is used quite frequently by its users. Tencent reports that one-third of the time spent on a mobile device is on WeChat. One of the reasons why Chinese users utilize the app so frequently is because of its versatility.

On WeChat, one can chat with a friend, shop and pay online, play games with friends, pay a utility bill or even order a cab. All the different applications, coupled with the app’s user friendliness have contributed to the company’s overall success.

Snap’s app, Snapchat, allows users to share pictures and videos that are designed to erase themselves after a set period of time. The app also provides users with stories from content creators that they could watch to keep updated on new trends or events.

Snapchat’s main competitors are Facebook and Instagram. In order to compete with these companies, Snap is thinking of changing the current app’s user interface to be more user friendly and incorporate algorithms.

The algorithms would assist users by showing them stories that may interest them. This would be a similar approach to those taken by Facebook and Twitter over the last few years.

November 20, 2017

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