21st Century Business Herald reporter Bai Yang Qingqing reports from Beijing
On the first day of 2024, before the New Year holiday ended, Baidu threw a heavyweight message to the industry.
On the evening of January 1st, Baidu announced that its affiliated company Moon SPV Limited had terminated the Share Purchase Agreement entered into by Moon SPV Limited, Baidu (Hong Kong) Limited, JOYY Inc., and other related parties on November 16, 2020, as amended or supplemented in the future, through the exercise of contractual rights.
Baidu stated that according to the previously signed Share Purchase Agreement, Baidu (Hong Kong) Limited agreed to purchase from JOYY and JOYY agreed to sell JOYY's domestic video entertainment live streaming business (YY Live) in China to Baidu (Hong Kong) Limited. However, the share purchase agreement stipulates that the delivery of the proposed acquisition must meet certain prerequisites, including obtaining necessary government regulatory approvals and other conditions, and if the proposed acquisition is not delivered before the final deadline, both the buyer and seller have the right to terminate the share purchase agreement.
As of December 31, 2023, which is the final deadline, all the delivery prerequisites stipulated in the share purchase agreement have not been fully met. Baidu stated that Moon will seek to negotiate with Huanju Group on the future arrangements of the transaction after terminating the equity acquisition agreement and explore reasonable solutions.
That evening, in response to Baidu's plan to terminate its acquisition of YY Live, Huanju Group also issued a statement in response, stating that YY Live's sale to Baidu had been largely completed on February 8, 2021, and certain matters still needed to be completed in the future. However, Baidu claimed in the notice that it had exercised its right to terminate the share purchase agreement and cancel the transaction. In this regard, the company is seeking legal advice and will consider all options it can take in response to Baidu's notice.
Simply put, it is the acquisition of YY Live, and Baidu does not want to continue, and the previously signed agreement has left Baidu with a window to terminate the transaction. Through the response from the gathering, it can be seen that before the announcement was issued, Baidu may not have communicated with them about terminating the agreement, or both parties communicated but did not reach a consensus.
A legal representative told reporters, "If both parties clearly specify a termination clause in the agreement, Baidu can exercise its rights.". However, it has been three years since Baidu signed the agreement with Huanju Group, not to mention that this is a sky high transaction involving over 3 billion US dollars. More importantly, the integration of YY Live and Baidu has also been advancing for three years. Both the YY team and Baidu's internal team have regarded YY as a part of Baidu. Now that Baidu suddenly says it wants to terminate the transaction, the process will not be so smooth.
$3.6 billion transaction
On November 17, 2020, Huanju Group and Baidu announced that they had signed an agreement to acquire YY Live, a subsidiary of Huanju, for approximately $3.6 billion in cash, including but not limited to YY mobile applications, YY.com website, and YY PC.
According to the transaction details disclosed by Baidu, approximately $2 billion (adjustable according to certain conditions) of the acquisition price must be paid to Huanju Group on the acquisition delivery date. After the acquisition and delivery, approximately $1 billion (adjustable according to certain conditions) will need to be paid no later than the delivery date or April 30, 2021, and approximately $300 million (adjustable according to certain conditions) will need to be paid no later than the delivery date or June 30, 2021, with a maximum of $300 million to be paid after meeting certain conditions.
The completion of the acquisition and delivery also requires certain conditions to be met, including YY Live not being affected by any significant adverse effects, YY Live's financial statements fairly reflecting its operating performance in all material aspects, obtaining necessary approvals from government regulatory authorities, Huanju Group completing several restructuring steps related to YY Live, and Huanju Group entering into a 10-year non compete commitment, Agree not to compete with Baidu in certain areas of Huanju Group's live streaming business.
On February 8, 2021, Huanju Group announced that the transaction to sell YY Live to Baidu has been basically completed. In March of the same year, in a document submitted to the Hong Kong Stock Exchange, Baidu also stated, "The acquisition has been largely completed, and some customary matters are expected to be completed in the near future. According to the terms and schedule of the share purchase agreement, after considering an adjustment of $100 million in working capital, we paid a total of $1.9 billion to JOYY and its designated joint management accounts, and deposited a total of $1.6 billion into multiple joint management accounts."
This means that in early 2021, Baidu spent $3.5 billion on the transaction. However, in the announcement at that time, Baidu also mentioned a sentence - "If the acquisition is not completed within the specified time, the stock purchase agreement can be terminated." It was this sentence that laid the groundwork for Baidu's announcement today.
It is worth mentioning that during the process of Baidu's promotion of the transaction with Huanju Group, Huanju Group was once short circuited, but this did not affect Baidu's acquisition of YY.
On November 19, 2020, just after the announcement of the aforementioned transaction, the well-known short selling agency Muddy Waters Research released a short selling report, claiming that Huanju Group was a fraudulent company and stating that after a year of investigation and research, YY Live, a subsidiary of Huanju Group, was suspected of falsifying data in revenue, profits, and paid users.
Muddy water also questioned Baidu in the report. The report states that it is no longer a secret that Baidu is striving to grow, but will it really spend more than 7% of its market value in cash to purchase an almost completely false business form (company) to achieve growth?
In response to the short selling of muddy water, Huanju Group responded at the time, stating that there were a large number of errors in the report. Subsequently, the audit committee of Huanju Group also conducted an independent review, and the final result was that the allegations and conclusions in the Muddy Waters report were not substantiated.
In the listing documents submitted by Baidu in March 2021, it was also mentioned that Baidu conducted due diligence in financial, legal, and commercial aspects before entering into the purchase agreement related to the acquisition and after Muddy Waters published a short selling report on Huanju Group. On February 7, 2021, both parties have made modifications to some of the terms and conditions of the original share purchase agreement and entered into a revised and restated share purchase agreement.
Baidu stated, "Considering the potential synergies that YY Live may have on our business, we believe that continuing to complete the transaction in accordance with the revised and restated stock purchase agreement is in our commercial interest.".
Baidu Live "Fever Reduction"
Baidu has shown great expectations for this transaction. Robin Lee, CEO of Baidu, once said that the acquisition of YY is an offensive move after Baidu has made progress in the construction of mobile ecological infrastructure. "The addition of YY Live will enable us to gain the platform and operating experience of large-scale video social media, and combined with Baidu's accumulation in knowledge, e-commerce and other live broadcast services, it will make Baidu one of the leading live broadcast platforms in China, and make another big step forward in the revenue diversification strategy."
He also mentioned, "Live streaming has become an indispensable infrastructure for internet platforms, and technology and data empowerment are key driving factors for future industrial transformation, including live streaming. Let's look forward to YY Live joining Baidu to bring new possibilities to the live streaming industry."
At that time, live streaming was indeed one of Baidu's key areas of focus. At the end of 2020, Shen Dou, then the head of Baidu's Mobile Ecology Group (MEG), stated that what Baidu is doing is shifting from traditional information search to service connectivity. "Live streaming is one of the media. Compared to text and short videos, live streaming is more timely and interactive."
Therefore, it is not difficult to understand Baidu's enthusiasm for YY at that time. A Baidu MEG management team previously revealed to 21st Century Business Herald reporters that the decision-making and approval process for acquiring YY went through the decision-making process of Baidu Investment Committee. As for the "sky high" acquisition amount of 3.6 billion US dollars, "I think it's worth it.".
In the view of the aforementioned management, prior to Baidu's acquisition of YY, YY's external customer acquisition costs and investments were relatively small, maintaining a high profit state. In the process of choosing to acquire live streaming targets, "Baidu has also seen many lower priced targets, ranging from 600 million to 1 billion, but it will also consider the overall explosive power and growth potential of the business after injecting capabilities."
The person pointed out that Baidu's own live streaming can achieve a 100% growth curve every year. As the pioneer of the live streaming industry, YY has a scale of over 10 billion yuan per year. It is better to do it together and can also feed back the Baidu mobile ecosystem.
According to 21st Century Business Herald reporters, in the process of communicating with Huanju CEO Li Xueling about the acquisition details, Baidu's concerns are more focused on compliance issues such as whether it involves pornography, whether it is fraudulent, whether there is high-risk content or gambling, rather than the price itself.
However, the acquisition, which was originally expected to be completed in the first half of 2021, was not completed as scheduled and the voice gradually weakened. According to 21st Century Business Herald reporters, in April 2021, Baidu had already deeply integrated its business with YY internally, but due to external environmental factors, it has not been disclosed to the public. A Baidu insider told reporters at the time that "we need to follow a step-by-step approach and wait for the final result", "Regardless, deep integration is the right thing to do."
In September 2021, the State Administration for Market Regulation released the Annual Report on China's Anti Monopoly Law Enforcement (2020), which disclosed that the Administration was conducting anti-monopoly reviews on 11 cases of business concentration, including Baidu's acquisition of Huanju Group and JD's acquisition of Liexin Technology. So far, the review results have not been disclosed, which has become the trigger for Baidu to terminate the transaction.
In fact, after a period of enthusiasm, the weight of the live streaming track within Baidu is also constantly decreasing. At present, Baidu is focusing on its AI business and has been continuously reducing costs and increasing efficiency in the past few years. Live streaming is also one of the optimized businesses.
At the end of 2021, Baidu was exposed to have carried out large-scale layoffs, and the live streaming business became a "disaster area" for layoffs. In May 2022, Baidu launched a new round of executive rotation, with Shen Dou being transferred from the head of MEG to the head of the Intelligent Cloud Business Group (ACG). This means that the "overall commander" who initially advocated for promoting the integration of Baidu Live and YY business has shifted to other places, and since then, this acquisition transaction has been almost no longer mentioned within Baidu.
Where will YY go?
Industry insiders have analyzed to reporters that although the antitrust review has indeed affected the final completion of the transaction, the review results have not yet been released, and YY Live has actually become a part of Baidu's business. At this time, Baidu's exercise of contractual rights to terminate the transaction is a loss of confidence in Live and a desire to stop losses as much as possible.
Looking back now, Baidu's transaction did indeed buy at a high point. In 2020, YY actually fell into a growth bottleneck. That year, YY's net income was 9.95 billion yuan and net profit was 3.141 billion yuan, both of which decreased compared to 2019. However, overall, YY's profitability is still very impressive, which can also help Baidu's monetization ability. In 2020, YY Live's net revenue, gross profit, and net profit accounted for 9.3%, 8.9%, and 16.5% of Baidu's total net revenue, gross profit, and net profit, respectively.
But in 2021, the entire live streaming industry began to step on the brakes, and turning from profit to loss has become a development trend for the entire industry. In 2021, Zhiwen Group's net loss was 2.914 billion yuan, compared to a net profit of 2.104 billion yuan in the same period of 2020; Douyu's net loss was 620 million yuan, compared to a net profit of 405 million yuan in the same period of 2020. Although Huya maintained annual profits that year, it also recorded a net loss of 313 million yuan in the fourth quarter.
Due to its merger with Baidu in 2021, YY will no longer disclose its performance separately. However, someone familiar with YY has told reporters that YY also faces significant growth challenges.
In this context, the future path of YY live streaming has also become elusive. Since Baidu has issued an announcement to terminate the transaction, it has already expressed its intention to abandon the YY business. However, although Baidu has the right to terminate the transaction, due to the passage of time, the refund for this transaction is not easy to obtain, at least not as much as the $3.5 billion paid at that time.
Analysts have pointed out that YY has certainly contributed to Baidu's profits to some extent in recent years, and if the transaction is terminated, this portion of the funds will need to be removed. Compared to this easier to liquidate book funds, the value of YY's assets in Baidu's hands has also changed over the past three years. How to calculate these assets may become an important controversial point for Baidu and Huanju Group.
A reference change is that in February 2021, after Huanju Group announced that YY's transaction had been largely completed, its stock price subsequently rose to approximately $143. However, as of December 29, 2023, Huanju Group's stock price was $39.7 per share, with a market value of approximately $2.4 billion, a drop of nearly 70% from three years ago. Based on this calculation, assuming that YY Live was valued at $3 billion three years ago, and now only $1 billion remains, how to define the value changes and who will bear them will depend on negotiation between both parties.
For Huanju Group, the YY business that has already been spun off is also somewhat out of place with its current all in overseas strategic layout. So, Huanju Group said it wants to seek legal advice and expressed an attitude of hoping to continue the transaction as much as possible without terminating it.
The current situation is that neither Baidu nor Huanju Group is willing to continue taking over YY, which makes YY's live streaming team very awkward. However, as a very mature live streaming platform, YY Live also has the ability to operate independently. Therefore, some analysts speculate that the negotiation result between Baidu and Huanju Group may also be for both sides to take a step back and turn YY into a joint venture company, allowing it to continue operating independently.
Of course, these solutions are only speculation from the outside world, and ultimately need to be discussed between Baidu and Huanju Group. As of the time of publication, Baidu has not provided a response regarding the business and personnel handling plan for the integration of Baidu and YY after the termination of the acquisition, the transaction amount handling mentioned in the agreement, and the future impact after the termination of the acquisition. Next, 21st Century Business Herald reporters will continue to monitor the follow-up progress of this matter.