Follow the herd

Quitting New York: Qihoo’s Zhou

Since going public Baofeng Technology has more than lived up to its name. The online video company, which means ‘storm’ in Chinese, debuted on the Shenzhen bourse in March at Rmb7.14 ($1.15). Its shares recently traded as high as Rmb307.6 a share, up 43 times in just three months.

Given this performance, it is easy to understand why some other tech tycoons are looking on with envy. One of them is Zhou Hongyi, the chairman of Qihoo 360. Last week the Nasdaq-listed Chinese anti-virus software provider announced that it is going to go private in an effort to relist the company in the Chinese A-share market.

A consortium led by Zhou made a preliminary non-binding proposal last Wednesday to take the company private at $77 per share, a 17% premium to its valuation prior to the announcement. If successful, it would be “the largest take-private deal of a US-listed Chinese company,” overtaking Focus Media’s $3.7 billion management-led buyout in May 2013, says the Wall Street Journal.

“This is a strategic decision made by carefully weighing the global and Chinese capital markets. Many of us believe Qihoo’s current market capitalisation of $8 billion does not sufficiently represent the value of this company,” Zhou wrote in an internal email to staff.

Qihoo is not the only US-listed tech firm that thinks it deserves a higher valuation. Jumei, an online retailer of cosmetics producers – and one which only debuted on the Nasdaq in May last year – is also actively studying the possibility of a homecoming after being “seriously undervalued,” the company’s chief executive Leo Chen told Southern Metropolis Daily.

It is not difficult to understand their sentiments. In addition to Beijing Baofeng, many tech counters on the domestic stock market have seen their valuations soar in the past year. Take Shanghai 2345 Network, another software provider. It now has a market capitalisation of Rmb48.5 billion, not far from Qihoo’s $8 billion even though Qihoo’s profit was almost 18 times its rival’s. If Qihoo decides to list on the A-share market, its market cap could be four times its current value in the US, comments Qianjiang Evening News.

“A-share valuations are at their highest in years, and so it would benefit these companies to explore going public in their home market. The central government is pursuing listing reforms, so Chinese companies need not bother setting up a VIE to go public abroad,” says Ricky Lai, a research analyst at Guotai Junan International.

The majority of overseas-listed Chinese internet companies operate under the VIE, or variable interest entity, structure. This setup allows Chinese companies – like Baidu and Alibaba Group – to form a new holding vehicle abroad that can then list overseas. That entity remains linked to the Chinese firm through complex and typically opaque legal agreements.

In addition to Qihoo, 18 Chinese companies trading in the US have received offers to buy out public shareholders since the start of April, the most ever in a single quarter, says Bloomberg. Social networking site Renren and online dating website Jiayuan.com, for instance, have received proposals to go private. Just over the weekend, three more companies announced that they have joined the fast-growing privatisation queue. Speculation is rife that Soufun, a property portal, could be next.

Still, relisting at home is not that straightforward. Typically, taking a company private takes about six months. Relisting in the domestic stockmarket also means that these firms will need to dismantle their VIE structure, which could take up to seven months. Filing for an IPO in the A-share market, meanwhile, could take as long as a year.

Moreover, much of the money behind the current ‘take-private’ drive appears to be speculative capital linked to the current Chinese stockmarket rally. Many of the announced deals could collapse if the Chinese stock market rally sputters, which could be starting to happen, says Doug Young, author of Young’s China Biz Blog. And as China Securities Journal says of the homeward route from the US: “There are just too many uncertainties and risks in the process.”

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