On December 24th, Beike, a prominent player in the internet home improvement market, announced through the Hong Kong Stock Exchange that it would terminate its acquisition of the remaining equity stake in Space IntelligenceThe decision stemmed from “prudent consideration of the uncertainties in meeting the closing conditions” required for the deal to go through.

This acquisition was first announced in October 2023, when Beike revealed that its wholly-owned subsidiary, Beike Meijia, had signed an agreement to acquire Space Intelligence for an amount not exceeding around 1.55 billion yuanThis acquisition would see Space Intelligence, known for its brand "Aikongjian," fully integrated into Beike’s operationsHowever, what was initially viewed as a promising transaction was suddenly called off, leading many to speculate about the underlying challenges.

The halt in this acquisition effectively puts a pause on Beike's expansion within the home improvement segment

Founded in 2014, Aikongjian has been a representative of the internet home improvement era, utilizing a triad of infrastructure elements: self-built supply chains, comprehensive information systems, and professional laborThe company had taken a leadership role in pushing for productization within the home design industryNotably, Lianjia (another Beike subsidiary) had previously invested in Aikongjian in 2016 and 2018, reflecting the latter's promising potentialBetween 2014 and 2018, Aikongjian raised funds across eight rounds, boasting a diverse investor pool that included both financial institutions and industry giants.

In the eyes of the market, Aikongjian had developed significant brand recognition and market share over the yearsObservers estimated that its integration into Beike would not only boost the latter’s expansion in the home decoration sector but also leverage Aikongjian’s well-established standardization processes and internet operational efficiencies

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After announcing the acquisition, Beike's CEO, Peng Yongdong, openly lauded Aikongjian, highlighting the insights and practices shared by its founder, Chen Wei, and his team.

Post-announcement, Chen Wei provided further details on the termination, revealing that concerns regarding potential industry monopoly issues hindered the acquisition from obtaining antitrust approvalFollowing amicable discussions, both parties agreed to terminate the mergerDespite this, analysts pointed out that even with Aikongjian’s substantial revenue, which hovers around 1 billion yuan annually, the combined revenue with Beike’s home décor segment would only represent a small fraction of the overall market, accounting for under 2% of the 35 trillion yuan home improvement industry – raising questions about the true nature of the monopoly concern.

Experts pointed out that the determination of whether a monopoly exists requires the validation of regulatory bodies

Moreover, the merger posed several challenges related to valuation difficulties, integration issues, policy obstacles, and the inherent financial, legal, and operational risks associated with acquisitionsEach of these challenges could prove fatal to a transaction if not adequately addressed.

Another industry expert emphasized the localized nature of real estate transactions and home improvements, arguing that examining national market share alone can be misleadingFor instance, while Beike holds about 10% of the real estate market nationwide, its influence in specific cities, like Beijing, cannot be overlooked, particularly given its entrenched position in the housing marketSimilarly, Aikongjian, having its roots in Beijing, could influence the local market dynamics significantly if the acquisition proceeded.

Beike’s past aggressive mergers within the real estate brokerage sector are a testament to its prior success

Over the years, it has acquired multiple firms, including Chengdu's largest brokerage in 2015, further stampeding through acquisitions across Shenzhen, Shanghai, and other citiesHowever, whether such a strategy can be effectively replicated in the home decoration sector remains a pressing question.

Amidst the backdrop of its halted efforts to acquire Aikongjian, Beike finds itself at a crucial crossroadThe home improvement business, which has swiftly gained traction, has emerged as a key revenue driver for the companyBeike made its foray into this industry in 2015 through a collaboration with Vanke, establishing a joint venture that initially claimed leadership in Beijing's home decoration marketYet, this venture faced difficulties, leading Vanke to withdraw and leaving Beike to navigate new trialsIn 2017, Beike launched the “Nanyu” home improvement brand through its new entity, Beijing Quanmiaojia Decoration.

With the launch of its self-operated brand BEEKEN Decor in 2020, following its two-year anniversary, Beike accelerated its push into the home improvement sector, unveiling a strategic agenda that evolved significantly by mid-2023. What was initially a singular approach transformed into a more intricate multi-faceted strategy involving not just real estate brokerage but also integrated expansion into home decoration, home care, and auxiliary services.

The growth trajectory of Beike’s home improvement segment has been impressive, with revenue contributions steadily rising: from 0.24% in 2021, to 8.31% in 2022, reaching over 16% in the first half of 2024. The third quarter of this year saw substantial gains, with net income from home improvement activities spiking 32.6% year-on-year to 4.2 billion yuan

During earnings calls, management reported a remarkable 25% increase in contract value during the reporting period, coupled with a 31.2% contribution margin from home improvement activities - a promising indicator of sustained growth.

Nevertheless, Beike is not alone in its pursuit of transformation within the home improvement marketMany tech giants are also attempting to disrupt the existing business modelsIt’s important to note that the Chinese home improvement market is characterized by a fragmented landscape where numerous players vie for visibility and relevanceVarious tech companies, including ByteDance, Alibaba, and JD.com, are diversifying their portfolio to include home decoration projects, showcasing platforms like “Zhujia” and “Lying Fan Family.”

Notably, new entrants like Huizhi and its associated smart housing brand secured a considerable amount of funding recently, attracting attention for its innovative approach to the home improvement landscape