On the first day of 2024, Baidu officially announced its departure from YY Live. On the evening of January 1st, the Hong Kong Stock Exchange announced that Baidu affiliate Moon had terminated its equity acquisition agreement for YY Live, a subsidiary of Huanju Group, in accordance with the previously signed agreement. As of the final deadline of December 31, 2023, due to the fact that all delivery prerequisites stipulated in the share purchase agreement have not been fully met, including obtaining necessary government regulatory approvals and other conditions, this three-year long transaction has finally come to an end.
This transaction was born during the heyday of the live streaming industry, but it has fallen into a stalemate amidst the huge changes in the market environment. Baidu announced on November 16, 2020 that it had signed a domestic video entertainment live streaming business for $3.6 billion, with the transaction expected to be completed in the first half of 2021. However, the transaction was not smooth, and the two parties extended the termination date of the transaction on August 16, 2021. Nowadays, good gathering and good dispersion may be the optimal solution for Baidu and YY live streaming.
The market environment has undergone tremendous changes, leading to a restructuring of the business landscape
At the time when Baidu announced its acquisition of YY Live, it was at the peak of the development of Chinese technology enterprises. After announcing the acquisition of YY Live in November 2020, Baidu's stock price rose for a quarter and reached $354.82 per share in February of the following year. However, as of the close on December 29, 2023, Baidu's per share price had fallen to $119.09, and its market value had dropped from its peak of over $100 billion at the beginning of 2021 to $41.6 billion, a decrease of more than half.
As of the close of December 29, 2023, the per share price of Happy Times has dropped from its peak of $143.58 in February 2021 to $3.97 billion, a market value reduction of over 72%.
In terms of other technology companies, Alibaba's market value has decreased by $612.4 billion from its peak in October 2020; Tencent, on the other hand, directly evaporated nearly HKD 4129 billion from its peak of HKD 729 per share in February 2021.
At that time, Baidu actively expanded its business territory through strategic investment and mergers and acquisitions. In order to break free from the dependence on search business in the PC era, Baidu has made efforts in AI technology and built a new AI ecosystem engine represented by intelligent cloud and intelligent driving, aiming to use hard technology to explore the second growth curve. On the internet track, Baidu chooses to increase market share through capital operations, and YY Live is one of the puzzles.
Due to the pandemic, the live streaming industry experienced significant development in 2020, making it known as the "Year of Universal Live Streaming". This year, Baidu has been taking frequent actions in its live streaming business: in March, Baijiahao officially launched its live streaming function; In May, a gathering energy plan was launched, stating that 500 million yuan will be used to support broadcasters; In June, Baidu Mobile Ecological Business Group established a live streaming business platform. According to Baidu's "Baidu Live Ecological Insight Report" released in early 2021, its advantages mainly lie in pan knowledge live streaming.
When announcing the acquisition of YY Live, both Baidu and Huanju Times were very optimistic about this transaction. Robin Lee said in the third quarter financial report: "YY Live will benefit from Baidu's huge traffic and booming mobile ecosystem, and Baidu will gain instant operating experience, large-scale video based social media development technology, and the enviable creator network." The second quarter financial report of Happy Times 2021 shows that after stripping YY Live, For the first time in the era of joyful gatherings, a basic break even at the group level has been achieved (not under US GAAP).
However, in the following three years, the live streaming industry further concentrated towards top comprehensive traffic platforms, and the market landscape continued to change. According to the previous report of Blue Whale Finance, the live broadcast business of Tiktok, Kwai, Station B, WeChat video number and other head traffic platforms continued to expand. Tencent also disclosed in the third quarter that its revenue source was transferred from low gross margin sources such as music live broadcast and game live broadcast to high gross margin sources with goods technology service fees. The former top gaming live streaming platforms Huya and Douyu are on a downward trend. Huya's quarterly average paid users in the first quarter of 2023 decreased by 700000 year-on-year, while Douyu's quarterly average paid users decreased from 4.5 million to 3.9 million from the first quarter to the third quarter of 2023.
YY Live, which used to belong to the same era as Huya, is also facing big exams. On November 19, 2020, the well-known short selling agency Muddy Waters claimed that about 90% of YY Live was false data. Baidu stated in its 2020 annual report that the allegations of murky waters and any related class action or regulatory enforcement actions may have a significant adverse impact on YY Live's business, financial condition, operating performance, cash flow, and reputation, and Baidu may also become a target of attacks from other short selling institutions in the future.
In 2023, Baidu's business will focus on the AI model. The new R&D expenses in the second and third quarters will mainly be used to support the servers of ERNIE Bot. By the third quarter of 2023, Baidu had obtained more than 70 million ERNIE Bot users, and restructured its applications with Wenxin's big model. Baidu CFO Luo Rong stated in the third quarter financial report of 2023, "We will continue to prioritize investing in AI, especially generative AI and basic models. At the same time, we will continue to focus on efficiency and strategic resource allocation."
In the market environment where cost reduction and efficiency improvement are the main focus of transformation, Baidu has abandoned the limited opportunities to seize the live streaming track and chosen to invest its limited resources into the future.
How does the transaction end when it is terminated?
Regarding Baidu's announcement of termination of the acquisition agreement, Juju Times announced on January 1st that it is seeking legal advice and will consider all options it can take.
Lawyer Chang Liang, a Ph.D. in law and director of Beijing Jiashan Law Firm, said, "Although the termination of such large-scale transactions is not common, it is not an unprecedented case." In September 2023, New Oriental New Materials Co., Ltd. received a notice from Nokia unilaterally terminating the sale of 51% equity in Dingqiao. On December 19th, both parties reached a settlement and terminated this transaction, and both parties withdrew, waived, and waived all claims, rights, and demands against the other party arising from this transaction.
Lawyer Chang Liang summarized that there are many reasons for the termination of the acquisition transaction. According to incomplete statistics, the main reasons for the termination of the acquisition transaction announced by the company are "failure of all parties to reach an agreement on the final conditions", "changes in the market environment", and "uncertainty in the operation of the underlying assets". Among them, there are many cases where the termination of mergers and acquisitions is due to the inability of all parties to reach an agreement on the transaction conditions.
The "delivery prerequisites" mentioned by Baidu in the announcement of terminating the acquisition agreement only mentioned government regulatory approval and other conditions, and did not disclose detailed information. Regarding this controversial focus, Lawyer Liu Anbang, a partner of Beijing Deheng Law Firm, stated that the "prerequisite conditions" are set in various ways based on specific business situations, mainly to ensure the realization of the purpose of the contract. For example, if there is an agreed delivery prerequisite that "the target company and its assets and liabilities have not had significant adverse effects during the transition period," but the company has violated regulatory regulations, significant safety hazards, and debt risks; There is an agreed delivery prerequisite that includes "matters discovered by investors during the due diligence process that need to be corrected or completed by the target company", but the company is unable to make actual adjustments to its promised personnel and business, resulting in the inability of the transferee to achieve the purpose of the contract; There are also reasons why regulatory approvals have not been approved.
The interviewed lawyers mentioned to Blue Whale Finance reporters that theoretically, as long as the two companies reach a consensus through consultation, the end of the acquisition period can be extended indefinitely. Lawyer Chang Liang stated that based on the announcements of both parties, this termination was unilaterally proposed by Baidu, and he no longer wants to extend the termination date of the transaction. Lawyer Chang Liang believes that the termination of Baidu's acquisition has long been foreshadowed. On the one hand, YY Live's revenue continues to decline in the red ocean of the industry; On the other hand, Baidu's acquisition of YY was repeatedly hindered during the process, coupled with adjustments to its later business strategy, and Baidu exercised its contractual rights to terminate the acquisition.
According to Baidu's 2020 annual report, after considering adjusting its operating capital by $100 million, Baidu has paid a total of $1.9 billion to Happy Times and its designated custody accounts in accordance with the terms and schedule stipulated in the share purchase agreement, and deposited a total of $1.6 billion into multiple custody accounts. Lawyer Liu Anbang explained that in simple terms, Baidu has already paid a prepayment of $1.9 billion, and the remaining $1.6 billion is awaiting regulatory approval for the transaction to be delivered.
Now that the acquisition agreement has entered a negotiation period of termination, how should both parties come to an end?
Lawyer Chang Liang stated that according to Baidu's disclosure in its annual report, If the proposed transaction is ultimately terminated and terminated, it can be recovered by refunding the advance payment and releasing the custody amount "Simply put, it means YY returns to Huanju. Huanju needs to refund the $2 billion received and release the $1.6 billion Baidu has placed in its custody account. However, in terms of actual operation, whether Baidu can refund the full price as desired still depends on the agreement signed between the two parties. Whether Huanju will ultimately return all of Baidu's cash depends on how well these two parties have finally negotiated."
Lawyer Chang Liang added that the $100 million working capital in the transaction is a fund used by Baidu to operate YY Live during the transition period of equity acquisition. If there are significant gains and losses during the transition period, the responsibility and attribution of the gains and losses need to be clearly stipulated in the formal acquisition agreement. "The (100 million US dollars) working capital may be agreed upon as part of the equity transaction consideration in the agreement, which will be refunded through negotiation between the two parties. The gains or losses of this working capital during the operation period will need to be divided according to the terms of the agreement."
Can Baidu and Juju Era achieve the result of New Oriental New Materials terminating its acquisition of Nokia? From the response, it can be seen that the attitude towards this joyful gathering is quite intense. Lawyer Chang Liang speculates that in the era of celebration, the following countermeasures can be taken: proving that our party has been legally and compliant, fulfilling all our obligations in accordance with the acquisition agreement, and not providing any false financial information. Retrieve evidence from regulatory authorities on the premise that there is no fault on our part. If it can be proven that the failure to pass regulatory review was caused by Baidu's own reasons or that Baidu caused significant business losses to YY Live during the process of managing YY Live, Baidu's termination of the contract does not comply with the acquisition agreement and requires continued performance of the acquisition agreement or compensation for economic losses incurred by Joyful Times.
When the acquisition case was announced earlier, although it had not yet been settled, Baidu had a responsible person in charge of managing the YY live streaming team, and both sides had some personnel integration. The employee who previously worked at YY Live confirmed to Blue Whale Finance reporters that their employment badge was printed with the words "Baidu Ecological Company", and the internal OA system used was also Baidu's "Ruliu". Baidu has already established a dedicated YY business unit internally for a long time. Lawyer Chang Liang analyzed, "After the acquisition is terminated, the direction of these employees will mainly depend on the adjustment of business lines."