Beijing—Consolidation on the highly fragmented Chinese Web 2.0 scene took a step forward when Oak Pacific Interactive (OPI), a Chinese Internet consortium, said Tuesday it had acquired Beijing-based Xiaonei.com, China’s leading collegiate social-networking site.

Xiaonei, which means “on campus,” will merge with OPI’s own collegiate social network site, 5Q. The combined entity will take its place beside other OPI properties, including the entertainment portal Mop.com, news site DoNews.com, YouTube clone UUMe.com, and classified ads provider RenRen.com

“There are still 20 smaller players out there,” said OPI CEO Joseph Chen.

OPI estimates that with the combined companies, it will have well over 90 percent market share among active collegiate SNS users. The company declined to give details of the financing.

“It wasn’t a cheap deal,” said James Liu, co-COO of OPI. “We paid a premium, but the team deserves it.”

The one-year-old startup was founded by Tsinghua university graduate Wang Xing, who will head the newly merged business unit. Mr. Wang could not be reached for comment.

“[Xiaonei was] shopping around for term sheets from VCs before we made the decision to buy,” said Mr. Liu. “The price we paid is higher than any of the term sheets they had, so Wang Xing and his team think it’s a good deal.”

The company was angel-backed, with money from Wang Xing’s family and from an ex-CTO of Amazon.com.

“There’s a ratcheting mechanism in there—a challenging one based on combined numbers of active and registered users, but it’s very much doable,” said Mr. Liu. “As long as they continue to perform at the current pace, they’ll hit the targets.”

Under Fire

Xiaonei has come under fire from some Chinese users for its uncanny resemblance, both in form and function, to the popular Facebook.com. But that’s not something Mr. Liu’s losing sleep over—not when Xiaonei can deliver close to a million active users in one of China’s most sought after demographic groups.

Last week at a Shanghai conference, Mr. Chen announced that OPI had spent some $20 million since March investing in and acquiring Internet companies in China. The acquisition of Xiaonei is the first such deal to be made public, but Mr. Liu said that OPI plans to announce another deal next month.

“Not all the deals are acquisitions,” said Mr. Liu. “Most are investments, for a controlling stake in some companies, while we’re a minority at a 30 to 40 percent stake in others,” he said. “Most of the investments are related to our core Internet business.”

In March, Oak Pacific Interactive raised a $48.1-million round led by General Atlantic Partners and DCM-Doll Capital Management. OPI, formerly known as CIAC, has twice won the Red Herring Asia 100 award.

Early Lead

Xiaonei.com took an early lead in the Chinese social networking space, soft-launching in October 2005 and formally opening for business in December, giving it more than half a year’s head start on OPI’s 5Q.

Xiaonei focused on China’s top-flight schools, including Tsinghau and PekingUniversity in Beijing, and Fudan and Jiaotong in Shanghai. 5Q, said Mr. Liu, was unable to gain a toehold in many of these schools, and focused instead on lower-tier universities.

In terms of total active users, the two sites were running neck and neck at the time of the acquisition, said Mr. Liu.

OPI’s courtship of Xiaonei began even before the launch of OPI’s 5Q. Finding the venture market tough going, Xiaonei initially approached OPI looking for a potential exit, but as discussions went on the site gained impressive traction to take a commanding lead in the market.

“We assumed that the deal might not go through, so we poured a lot of resources into catching them [with 5Q],” said Mr. Liu.

OPI is confident that advertising, the mainstay of Mop.com’s revenue, will sustain the new Xiaonei/5Q entity. Mop.com, Mr. Liu said, currently ranks among the top 10 Chinese Internet sites in terms of ad revenues, behind search engine Baidu, portals Sina and Sohu, game site Netease, and instant messaging service Tencent.

The combined Xiaonei/5Q entity will be a hit with advertisers looking to build brand awareness with China’s elite college graduates, said Mr. Liu—“mostly fast-moving consumer goods,” he said.

Integration, of course, is never easy, and in the case of Xiaonei and 5Q, it’s possible that snobbery might create friction. Xiaonei’s users, after all, are a kind of Ivy League elite, while 5Q—well, let’s just say their college entrance exam scores weren’t quite as high.

No issue there, said Mr. Liu. “The bottom line is this: Tsinghua may have a lot of elite students, but they still have to date,” he said. “Where do they go? They go to the other schools. They need to socialize with other people than their potential entrepreneurial partners and future VCs. They need to meet attractive girls.”

Contact the writer:KKuo@RedHerring.com

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