Two of China’s largest Internet companies, Alibaba and Tencent, have become the new best buddies after a fierce rivalry for over a decade. Alibaba-backed Meituan.com and Tencent-backed Dianping.com have agreed to merge to create a dominant online-to-offline player. The combined entity would pose a serious threat to Baidu, which has pledged to invest $3.2 billion in its own O2O platform Nuomi.

Alibaba Group, Tencent Join Hands To Challenge Baidu In O2O

Alibaba, Tencent come together for the second time

It’s the second time this year that Alibaba and Tencent came together to fend off the competition. In February, Alibaba-backed taxi-hailing service Kuaidi Dache merged with Tencent-backed Didi Dache to form Didi Kuidi Joint Co. The combined taxi-hailing service raised $3 billion from investors at a valuation of $16 billion to curtail the rapid expansion of Uber in China.

Meituan.com is often hailed as Groupon of China. According to Analysys International, it had 52% market share in local services in the first half of this year, followed by Dianping.com with 30% share. Investors hope that their merger will shift focus from competing against each other to taking on Baidu’s Nuomi. Baidu has been investing heavily to connect online users with offline services. Chinese Internet giants are betting that consumers will increasingly use their mobile devices to book everything from restaurants to taxi rides to grocery deliveries.

Alibaba, Tencent dividing the Chinese Internet businesses between them

Meituan is currently valued at $11 billion while Dianping raised funds in March at a valuation of $4.05 billion. Tencent owns 20% stake in Dianping, but Summit Research analyst expects the company to hike its stake in the combined entity. It’s strange that Alibaba and Tencent have joined forces in two different fields within a year. It will help them freeze out potential competition while dividing the Chinese Internet businesses between them.

Baidu’s Nuomi has only 13.6% market share in providing local services. A Baidu spokesman said the market was still in its early stage of growth, and it was too early to say who is going to win the game.

Alibaba shares jumped 3.75% to $66.32 at Wednesday close.