The video websites are to merge to form the largest video online company in China.

China’s two biggest video websites and are to merge, to become the largest video online company in China. 

The former rival companies have signed a definitive agreement for Tudou to combine with Youku in a 100% stock-for-stock transaction.

The two companies emerged in 2006, with Youku becoming listed on the New York Stock Exchange in late 2010 and Tudou on Nasdaq in 2011.

After the merger, Youku’s shareholder and its American depository share (ADS) holders will own 71.5% of the new company’s shares while Tudou shareholders and its ADS holders will own 28.5% of the new company.  Youku’s ADSs will continue to be listed on the NYSE under the symbol “YOKU”. 

The merger is expected to close in the third quarter of 2012. 

The new company is expected to occupy 80% of China’s Internet video market.  After the merger, each brand will manage its own ad revenue.  But the two brands will begin to jointly broadcast video contents and will share or exchange licensed contents.  The two brands will jointly purchase licensed contents from Chinese and overseas entertainment firms.

“We intend to lead the next phase of online video development in China. Youku Tudou Inc. will represent a differentiated leader in the online video market in China with the largest user base, most comprehensive content library, most advanced bandwidth infrastructure and strongest monetization capability within the sector,” said Victor Koo, founder, chairman and chief executive officer of Youku. “We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management and other common expenses,” he added.

“Youku and Tudou share a vision for the future of online video in China and how to deliver the best user experience possible,” said Gary Wang, founder, chairman and chief executive officer of Tudou. 

The merger is likely to stave off competitors in the market and reduce operational costs for both companies at a time when video websites in China are still struggling to find balance between the high bandwidth costs and the less-than-satisfying ad revenue. 

Youku’s 2011 financial results, which were announced today, indicate that although its loss has gradually decreased and net revenue has continued to grow, its net loss in 2011 still reached $27.3m. and both began actively purchasing film and TV contents from overseas film companies in 2010. Youku has reached deals with Warner, Warner Bros and Lionsgate to distribute their film titles on while Tudou has recently licensed the Lion King from Disney.