No more than a couple of days after publishing my article Baidu's Much Needed Sina Weibo Leap of Faith, rumors started to swirl that Ali Baba was set to make a direct investment in Weibo. While the rumors remain unconfirmed, the rather convenient nature of their timing is hard to ignore. Yes, when stocks fall 15% the day before such a rumor is leaked, I tend to get suspicious, and this is coming from someone who is long the stock. However, there was something about this rumor that made it even more fishy, and that was the fact that I actually listened to Sina's (SINA) conference call - a call which, out of the roughly thousand plus calls I have listened to over the past 14 or so years, struck me as particularly odd.
The reasoning behind this was the tone was more negative than it needed to be. After Baidu's (BIDU) and Tencent's results, the market was pretty conditioned for the weakness in the overall advertising market, and Sina's particular issues regarding the MVAS business are not exactly a major surprise. But here was Sina management bringing up Weixin, which Sina Ceo Charles Chao described as 'a popular mobile-based social network offered by Tencent,' in his opening remarks. And he didn't just bring up Weixin, he credited the website for what at present is a negligible drop in average daily time spent on the Weibo. Now, I am all for honesty from CEOs, but over the years, I have gotten used to the fact that management doesn't really like to directly credit competition with anything until you literally force it out of them or the environment changes so drastically that they have no choice but to discuss the problem. Charles Chao had no need to bring up Weixin at this point, as he is running the hottest social web platform in all of Asia right now. So why bring it up?
It's not like the metrics impact warranted addressing anything now. Better yet, why not wait for an analyst to raise the issue and address it then? Odd, wouldn't you say? And my issues with this call didn't stop there. Sina is in Weibo investment mode and the market knows that. When I look at this stock, I frankly don't focus on quarterly results. What I want to know is how excited (think Bezos and AMZN calls) they are about the progress they are making cracking the Weibo monetization nut, and listening to this call it seemed that despite great progress this management team was outright depressed. I mean, if I intentionally wanted to talk the stock down, I probably couldn't have done a better job than they did. Which brings me to my next point: the complete and total lack of any discussion regarding strategic plans for Weibo. Sina management has talked IPO on their calls before, and you don't have to be a genius to figure out the Chinese retail appetite for a Weibo offering would be unprecedented. Normally, when a management team sitting in such a position has a bumpy quarter, they play this card and tease the market with talk of plans gaining forward to unlock value and boost the share price. Yet we got zilch on this topic from management and the out to lunch analysts, who I guess don't think even raising such a question is worth their time. I mean, I don't want to sound like a conspiracy theorist, but you have to be a fool to ignore all of this.
So here is what I think is happening…
I think this Ali Baba rumor is a smoke screen, and that Sina is in active discussions with Baidu to sell the whole company. My reasoning is simple. Sina has the cash to fund Weibo's growth, and while Ali Baba would make for a good strategic partner (payments), they don't need them, and if they had wanted such a strategic equity investor in Weibo, they could have gotten one months ago without any problem and at a higher valuation. Add in that Baidu and Sina already have a mobile partnership in place, and my thesis looks even better. Furthermore, nobody can deny that Baidu/Sina makes a lot more strategic sense than Ali Baba/Sina. So, even if Ali Baba and Sina are in talks, I am sure that the first call Charles Chao will make will be to Robin Li at Baidu, who I am sure agrees that consolidation and strategic fit make them a better match.
There is of course one other scenario to contemplate here and that is that Charles Chao is prepping for another opportunistic management buyout like the one he pulled off in 2009. Considering how well that worked out for him, and factoring in that with Weibo the stakes are now much higher, I can only imagine that he would jump at such an opportunity if it presented itself. In which case, a lower share price is what he wants, so he can grab as much of Sina as he can before doing anything with Weibo. To be clear, if I was in his shoes and had the PE guys and bankers on speed dial that helped me pull this off 3 years ago, I'd have to think about seriously giving it another shot. This is of course not my base case because I think Chao gets the fact that consolidation is needed and that Weibo will be a much stronger platform if it is under Baidu's roof, but I can't rule it out for now.
Disclosure: I am long SINA.