Chinese technology and media conglomerate Tencent Holdings Ltd have formally announced that they have invested almost $2 billion to acquire a 12% stake in disappearing messaging-application Snapchat. The news comes just days after Snapchat posted poor quarterly results leading to a share price drop by 16% to $12.67, a far cry from its $17 IPO in March.
Investors expressed concern at Snapchat’s slow growth in this quarter which has subsequently had a severe impact on its share price. The stake acquisition by the Chinese firm couldn’t have come at a better time for the picture messaging application, but many industry analysts on Wall Street are viewing Tencent’s move as an investment rather than precursor to a merger.
Securities Analyst, Michael Pachter said this type of acquisition was indicative of the way the Chinese conglomerate conducts its business. He said, “Tencent buys all sorts of minority investments, and I don’t think we can extrapolate that this means they intend to take over the company.”
Snap have disclosed that it only received the details of Tencent’s bid earlier this month. Tencent will receive 145.8 million CLASS A common shares of Snap which is worth over $1.7 billion at Wednesday’s price. However, the Chinese company has been given no voting rights despite the significant investment. Tencent president Martin Lau was reported to have expressed his delight at the deal, and said his organization was excited to strengthen and extend its relationship with Snapchat.
The acquisition by Tencent is just the latest in a series of investments made by the Chinese conglomerate which owns mobile chat service WeChat, which is the equivalent to WhatsApp in China. In addition to this, it has bought stakes in ride-hailing firm Lyft and electric car manufacturer Tesla.
Investments in the US by Chinese technology heavyweights have become a recurring trend in recent years, and it was evidenced further by both countries unveiling $9 billion in new deals last week. Alibaba and Baidu have invested heavily in US firms over the last number of years in an effort to extend its presence to the US.
Snap’s ownership structure, which reserves 95 percent of voting rights for its co-founders, made it likely Tencent was just accumulating a financial stake, analysts said. While the stake could lead to a business partnership with Tencent and help Snap expand its reach into China, Morningstar analyst Ali Mogharabi said Snap’s problems remained, chiefly slowing user growth and competition from Facebook Inc’s Instagram.