Merger planned between advert sites 58.com and Ganji.com

New York-listed 58.com and a second Chinese online marketplace have agreed to merge, as consolidation accelerates in the local technology sector.

A memorandum of understanding between 58.com and Ganji.com, which both function much like US site Craigslist, was signed in Beijing on March 14, people familiar with the matter said.

The two groups are expected to announce as soon as Wednesday that they are planning to combine to create what will become one of the largest specialised online classified companies in China's booming mobile internet space. The combined group could be valued at as much as $10bn, one person involved in the transaction said.

Because of antitrust concerns the transaction will probably involve two stages. Currently 58.com is about twice as big as Ganji.com, but both companies provide a range of online advertising listings including job adverts, housing and second-hand goods.

Last year, internet giant Tencent bought a 20 per cent stake in 58.com, and the online marketplace announced last month that it had acquired Shanghai-based property-listing platform Anjuke Inc for about $267m in cash and shares.

Haoyong Yang, the founder of Ganji.com, will become one of the co-chief executives along with Jinbo Yao, founder of 58.com, the person said.

By joining forces, the two hope to reduce marketing costs substantially. Each spend about $250m a year on such efforts, one investor said. US-based private equity firms have stakes in both groups, with Warburg Pincus an investor in 58.com while Carlyle, Sequoia and Tiger Global, among others, have stakes in Ganji.

The latest merger comes at a time when investors are very bullish about Chinese internet shares but are also concerned that many of the sector's companies are burning too much cash as they subsidise their operations to attract customers.

"People are fighting over the market," said one leading tech investor. "There is so much money thrown at these companies that they are virtually paying people to use their services. The money is not being used efficiently."

The merger plans come at a time when some western investors in mainland Chinese internet firms are starting to pressure the management to place more focus on shareholder value.

"Many companies make decisions on the basis of ego of their founders, not economics," this investor added. "Even when they only have small stakes in their companies."

In some cases, that has led to merger talks.

Last summer, two of China's leading online taxi services, Kuadi Dache, which is part owned by Alibaba, and Didi Dache, part owned by Alibaba's bitter rival Tencent, ended their price war and agreed to combine.

"It was like Romeo and Juliet getting married with the blessing of both sets of parents," this person added.

The planned listing of Alibaba's financial operations in China this year is expected to give rise to another bout of frenzied activity in the space.

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