Youku and Tudou Surprise Competition With Merger Announcement

Chinese online video site Youku (NYSE:YOKU) has agreed to merge with Tudou (NASDAQ:TUDO) in a stock swap valued at an estimated $1.1 billion. The surprise deal was announced this morning before the two companies opened for trading

The two companies have until now been rivals competing in a segment that is struggling to generate revenue and profit because most of the content is free. However, investors believe online video platforms will ultimately yield sizable earnings.

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Youku and Tudou are pooling their resources in anticipation of regulatory changes that could allow online video sites to play a larger role in China’s evolving media sector. Under the terms of the agreement, Tudou shareholders will swap their shares for those of Youku. The new company will be renamed Youku Tudou.

The two Chinese companies are now vying to pool their resources in anticipation of regulatory changes that could allow online video sites to play a larger role in China’s evolving media sector, perhaps even competing directly with state-controlled television. It is unclear whether the deal would have to pass regulatory scrutiny in the United States, where the two companies are listed, or in China, where they operate.

Youku and Tudou together control about a third of the online video advertising market in China. The merged companies “Will represent a differentiated leader in the online video market in China with the larger user base, the most comprehensive content library, most advanced bandwidth infrastructure, and strongest monetization capability within the sector,” Victor Koo, Youku’s chairman and chief executive, said in a statement on Monday.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com