Why Vipshop Holdings Shares Skyrocketed Today

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What happened

Shares of Vipshop Holdings (NYSE: VIPS) have skyrocketed today, up by 42% as of 12 p.m. EST, after scoring a huge vote of confidence from Chinese tech giants Tencent (NASDAQOTH: TCEHY) and JD.com (NASDAQ: JD). The two companies announced they will invest $863 million combined in the online discount retailer.

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So what

Both larger companies will be purchasing Class A ordinary shares at a price of $65.40 per share, which translates into $13.08 per American depositary share of Vipshop. Five American depositary shares, which are what trade in the U.S., represent one Class A ordinary share. That purchase price represents a 55% premium over Friday's close.

Tencent will purchase $604 million worth of shares, which will bring its total stake in Vipshop up to 7%, while JD.com will be investing $259 million, good to bring its total stake up to 5.5%.

Now what

In addition to the investments, Tencent and JD.com are entering into business cooperation agreements with Vipshop, getting greater exposure on their respective platforms. Combined, the companies are looking to compete more aggressively with Alibaba.

Both companies will be subject to a two-year lock-up restriction on these new shares, and will be able to appoint a director and an observer to Vipshop's board for that time frame. The director and board observer rights will be maintained if Tencent and JD.com hold 12% and 8% stakes, respectively, at the end of the lock-up period, which teases the prospect of future investments.

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Evan Niu, CFA owns shares of BABA and Tencent Holdings. The Motley Fool owns shares of and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.