Mar 25, 2013 · 4 minutes

China’s startup ecosystem hasn’t exactly been renowned for its fervor for mergers and acquisitions. Until very recently, the prevailing Internet industry culture has been to poach and copy rather than acquire and innovate. In the Web 2.0 era, the biggest Internet companies in China – Baidu, Alibaba, Tencent, and Sina – have been allowed to take a very startup-unfriendly approach, because they’ve had the financial clout to be able to do so, and because, frankly, the ecosystem hasn’t been mature enough to support such a way of thinking. Even Weixin, Tencent’s ass-kicking mobile chat app that now claims more than 300 million users, started life as a rip-off of Hong Kong’s TalkBox.

In the last two years, there has been some M&A activity in China – the $1.1 billion merger of video sites Tudou and Youku; Baidu’s $306 million stake in travel portal Qunar; Tencent’s $84.4 million investment in travel site eLong – but the number of deals worth talking about could still be counted on two hands. Innovation Works, China’s equivalent of Y Combinator, has so far had only three exits from 54 portfolio companies over three and a half years.

However, early indications from 2013 suggest that China’s M&A market is about to get real. Innovation Works, for instance, looks like it’s about to get its fourth exit, with various sources reporting that ecommerce giant the Alibaba Group has agreed to acquire Umeng, a mobile apps analytics platform. One rumor puts the acquisition price at $70 million, although neither Umeng, Alibaba, nor Innovation Works have yet said anything about the deal. Beijing-based Umeng was founded in 2010 and in July 2011 raised a Series A round of $10 million led by Matrix Partners.

The Umeng purchase will be Alibaba’s second big acquisition of the year. In January, it picked up streaming music service Xiami, which TechInAsia suggests is part of a push by the ecommerce giant to make its products and services more social. Alibaba was also rumored to be part of a $40 million Series B funding round for flirting app Momo, which is kind of like Tinder but at last count was growing at a rate of 1 million users a month.

There could be more to come. Last week, Alibaba’s iconic founder Jack Ma said that the company was not as innovative as Tencent, signalling that the company will go the acquisition route as it tries to ramp up its mobile services. “We invested a lot of money but we weren’t lucky enough, and we didn’t have that much innovation,” Ma said at an investment conference in Hong Kong. “When it comes to innovation, Alibaba isn’t as good as Tencent; they have the powerful Weixin.” (Translation provided by TechInAsia.)

Today, there’s also a rumor that Baidu is acquiring video streaming service PPStream and merging it into the search giant’s existing video service, iQiyi – itself a product of an acquisition – in a deal worth $350 million. Reports suggest that a term sheet has already been signed by the two companies.

Last summer, we reported that China’s M&A market for the tech industry was on the cusp of rapid expansion, even as the country’s IPO prospects were bleak. At the time, Fritz Demopoulos, who co-founded Qunar and had earlier sold a sports portal in China, said he was very excited about the prospects for M&A activity in China. “The big players can’t do everything on their own anymore,” Demopoulos, said at the time. Those companies had also grown up, he said. “They know how to buy companies, they know how to do partnerships.” At the same time, we noted that the Internet giants were stocking their M&A war chests. Baidu, for example, had $1.34 billion cash in hand as of this time last year, while Tencent was in possession of a $1.5 billion venture fund.

Another factor driving the need for more acquisition activity is the advent of the mobile era. While Baidu, Alibaba, Tencent, Sina and the other Chinese Internet heavyhitters – most of which are involved in gaming – have dominated the desktop era, they have had some difficulty shifting their heavy weights into an environment in which the country’s hundreds of millions of Internet users are accessing the Web mainly through mobile. Tencent has struck gold with Weixin (which has an English-language version called WeChat), but none of the others have yet registered great mobile success stories.

The opportunity opened up by the mobile era coupled with the increasing maturity of the giants and their willingness to invest in or acquire younger companies rather than take the habitual “copy and crush” approach offers some encouragement for Chinese entrepreneurs who can now look forward to brighter hope of a solid exit. A first-class example: Tony Chen’s mobile karaoke app Changba, a startup that found its first 10 million users in the space of 40 days and now has 50 million users and has started seriously monetizing through the sale of virtual items.

The distractions of early 2013 in China are now out the way. Chinese New Year is done. Jack Ma is no longer CEO at Alibaba. The country’s new President is settling into his job. Now the business starts – and China’s startup ecosystem looks like it’s going to be busier than ever.