Why Is China’s Tencent Buying Non-Voting Shares of Snap?

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Shares of Snap Inc. (NASDAQ: SNAP) plummeted by 20% after the company reported weak third-quarter results after markets closed Tuesday. On Wednesday morning, the company’s filing with the U.S. Securities and Exchange Commission (SEC) revealed that China-based Tencent Holding, owner of the country’s top social media app, WeChat, had acquired 145.8 million Class A common shares in Snap, lifting its stake in the company to 10%.

For a moment in Wednesday’s premarket session, Snap’s shares traded up as much as 3% from Tuesday’s closing price of $15.12. Then traders remembered that Tencent’s purchase was made on the open market and none of the purchase goes into Snap’s pocket.

Perhaps worse, Class A common shares have no voting power. That means that Tencent owns 10% of a something over which it has no control. Influence, maybe, but control — zero.

Here’s what Snap said about Tencent’s investment in its Form 10-Q filing with the SEC:

Our long-term shareholder Tencent Holdings Limited (“Tencent”), a global Internet company based in Shenzhen, China, has notified us that it has recently acquired 145,778,246 shares of our non-voting Class A common stock via open market purchases.

We have long been inspired by the creativity and entrepreneurial spirit of Tencent and we are grateful to continue our longstanding and productive relationship that began over four years ago. For its part, Martin Lau, Tencent’s President, informed us that Tencent is excited to deepen its shareholding relationship with us, and that it looks forward to sharing ideas and experiences.

Because our Class A common stock is non-voting, … Tencent and Snap are not obligated to disclose changes in Tencent’s ownership of our Class A common stock, so there can be no assurance that you, or we, will be notified of any such changes.

What all of that appears to mean is that Snap doesn’t know what’s going on but that it intends to listen to Tencent because it’s the decent thing to do.

Here’s a hint: By piling up non-voting shares, Tencent has acquired significant strategic leverage over Snap. For example, what happens to Snap if the Chinese firm decides to dump its 10% all at once? That would be seriously ugly, and with that threat, Tencent has assumed the role of an investor with a major influence on Snap’s fate.

Shares of Snap traded down more than 12% a little more than an hour before markets opened Wednesday, at $13.21 in a 52-week range of $11.28 to $29.44. The 12-month consensus price target was $14.78 before last night’s earnings announcement.