Renren Downsizes Games, Ripe For Picking?

| About: Renren Inc. (RENN)

Former social networking (SNS) superstar Renren (NYSE:RENN) is reportedly downsizing its online game division, formerly its most promising unit, leading me to wonder if earlier rumors that the company’s days as an independent entity may be numbered. The story behind Renren’s rapid rise and now apparent fall is simple: The company was once considered China’s equivalent of Facebook (NASDAQ:FB), and used that comparison to launch a successful IPO back in 2011. But since then it has been overtaken by other social networking services, most notably Sina’s (NASDAQ:SINA) Weibo microblogging service and Tencent’s (OTCPK:TCEHY) WeChat, putting the company’s future in jeopardy as it looks for a competitive advantage.

News has also been scarce this past year from Renren’s former chief rival, Kaixin, which was also reportedly chasing a New York IPO in 2011 but ultimately abandoned the plan. The difficulties faced by both companies reflects the unusual route that China has taken in the SNS space, where the Facebook model seems to be less attractive than the microblogging one used by Twitter (NYSE:TWTR) and the instant messaging one used by companies like Whatsapp and Line.

All that said, let’s go back to Renren, which has struggled to find profits in its 2 years as a publicly traded company as its core SNS service struggled to find a money-making formula. Its one bright spot was its online game business, which was reportedly earning a profit at one point and looked like a potential candidate for a spin-off and separate public listing. But that looks unlikely now, following word that Renren has recently decided to downsize the unit amid declining business. (English article)

According to the latest reports citing an internal company memo, Renren has decided to downsize the online game business due to weak performance in the last few quarters. The reports say revenue for the unit has actually started to contract, following strong growth in earlier days. It cites fierce competition and mismanagement as the main reasons for the rapid turnaround, which doesn’t surprise me considering the number of big-name Internet companies now in the space, led by Tencent, NetEase (NASDAQ:NTES) and Shanda (NASDAQ:GAME).

While it’s probably too early to write an obituary for Renren’s online game business, this downsizing certainly doesn’t look encouraging. The scale-back comes just 3 months after Renren sold its Nuomi group buying site to online search leader Baidu (NASDAQ:BIDU), and rumors last month that Renren might sell the rest of itself to Baidu as well. Renren’s spokesman said those rumors were groundless, and perhaps they were at the time.

But this latest setback for its online games, coupled with its inability to climb out of the red, could certainly cause the company’s leaders to think seriously about selling Renren to a bigger player with more resources and potential synergies. Renren’s stock doubled immediately after its 2011 IPO on hype about the comparisons with Facebook. But its shares have languished since then as it remained mired in the red. Its stock now trades at about $3.50 per American Depositary Share (ADS), or about one-quarter of its IPO level.

If I were betting, I would say that Renren’s days as an independent company won’t last too much longer. Its current market value of about $1.3 billion would make it relatively easy to swallow for a number of China’s top Internet firms, which have shown a recent appetite for such purchases. Baidu would be the most logical buyer following the Nuomi deal, but the acquisitive Alibaba or another smaller player like Qihoo (NYSE:QIHU) or Sohu (NASDAQ:SOHU) could also step up and make such a purchase. All that said, I would be surprised if Renren is still an independent entity by the end of 2015.

Bottom line: Renren is likely to be acquired by another company in the next 2 years, as the company’s game business falters and it struggles to find a formula for profits.