Here's a strange one: In a bid to bolster its international cloud infrastructure services business, Chinese web-scale giant Alibaba is allegedly on the verge of acquiring ZTE's software unit in a deal that could be worth more than US$440 million, according to a Bloomberg report.
The report, which cites unidentified sources that have knowledge of the deal, suggests that Alibaba Group has been in negotiations for months to acquire ZTEsoft Technology Co., a majority-owned subsidiary of ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), for up to 3 billion yuan (US$442 million) and is close to an agreement.
The rationale, apparently, is that the online giant sees the acquisition of ZTEsoft as a way to grow its Alibaba Cloud business outside China and make it a stronger competitor to the likes of Amazon Web Services Inc. (AWS) and Microsoft Azure. ZTEsoft's international customer base and relationship with telecom operators in Europe and Africa are, apparently, valuable to Alibaba Cloud, which already boasts Vodafone as a customer.
ZTEsoft, which was spun off as a standalone unit last year and has its shares listed on China's NEEQ (National Equities Exchange and Quotations), sells software systems (OSS and BSS) and related services to telecom operators and smart city/IoT systems to enterprises and governments. It claims to have 145 operator customers in 80 countries. In 2016 it reported revenues of 1.93 billion yuan ($285 million) and a net profit of 130 million yuan ($19.2 million).
However this scenario plays out, a few things are clear.
Alibaba Cloud has global ambitions to be a major international cloud services player -- hence the recent relationship with Tata Communications -- and is set to open two new data centers in the coming months, in Mumbai, India and Jakarta, Indonesia. Once those are up and running and its recently announced facility in Malaysia is operational, Alibaba Cloud will have 17 data centers globally: It currently has facilities in mainland China, Australia, Germany, Japan, Hong Kong, Singapore, the United Arab Emirates and the US. (See Equinix, Alibaba Eye Cloud Expansion With New Partnership and Tata Comms Hooks Up to Alibaba Cloud.)
But it has a lot of ground to make up on the market leaders, particularly AWS. (See AWS Public Cloud Dominance Continues – Report.)
Its cloud infrastructure services business is growing quickly, though. For the full financial year ending March 31, 2017, Alibaba reported cloud services revenues of $968 million, up by 121% year-on-year, while the number of cloud computing paying customers grew to 874,000 at the end of March this year, up from 513,000 a year earlier. The cloud business is not yet breaking even, though, as it reported an operating loss of $244 million for the full financial year.
Citing IDC 2016 market tracker numbers during its recent investor day, Alibaba Cloud claims to be the number four cloud infrastructure services provider in the world, though its market share is only 3.2%, compared with AWS (46.1%), Microsoft (7.6%) and IBM (5.8%). That does, though, put it ahead of Google (2.9% market share).
At the same time, ZTE could probably do with a cash injection. It is currently seeking $11.4 billion in credit financing, and suffered a net loss in 2016 as the result of a US trade fine, though its first-quarter financials showed a rise in revenues and profits. (See Soft Loans, Trade Hardball: ZTE Seeks $11B in Credit Finance, ZTE Bounces Back in Q1 After US Trade Fine and ZTE Suffers $340M Net Loss on US Fine.)
— Ray Le Maistre, , International Group Editor, Light Reading