Saturday, 30 April 2011

Vanity thy name is Chinese internet company

Why does a Chinese internet company wish to get listed in the US ? I can't fathom the logic. Hence this post.
The Chinese internet landscape is a strange one. Almost every one of the global majors is blocked. Facebook, YouTube, Twitter, Blogger, you name it and it is blocked. Instead there is a carbon copy of each one of them locally in Chinese. For Google, read Baidu. For Facebook, read Renren, for YouTube read Youku or Tudou, for Twitter read Sina Weibo or the dozens of similar clones. These are the ones that are wildly popular, having millions of users, only in Chinese and therefore almost exclusively used by Chinese. Never mind that these  are all censored , watched, bullied, etc etc by the jīndùn gōngchéng (The Great Firewall). This post is not about that cursed censorship.

These sites are all by entrepreneur led start up companies , similar to the American originals.  And they all want to list and make huge money. Fair enough. But they seem to want to list in the US. Qihoo 360 (an antivirus company) and 21 Vianet (a hosting service provider), recently listed. Renren is next on line. As is Tudou. Why O Why ?

Its fair that you want to list in the market which can give you the highest IPO price. These days valuation of a company rarely depends on where it is listed. You want to list in the market that is most liquid. The Nasdaq is the most liquid market for such companies in the world. But for the size of these companies, there is enough liquidity in virtually any major market. You would list in a place where your major customers are (the reason why Indian software companies are all listed in the US), as this is a significant weapon in a sales pitch. But none of these Chinese companies are targeting the US - Americans are not going to learn Chinese in a hurry.

Consider the downsides. You fall into the dreaded ambit of the Sarbanes Oxley Act, although that tiger is looking rather old and the canine is decaying. You need corporate governance standards that are going to be a real challenge to meet for Chinese companies. You open yourself to requirements of transparency that sit uncomfortably in China. The possibility of getting sued always exists - Renren hasn't even listed and already noise is being created that the prospectus is misleading.

There is the obvious alternative for these companies - Hong Kong. Highly liquid market, excellent valuations to be got, internationally respected, but without the major downsides such as the Sarbanes Oxley Act. And they can speak Chinese in Hong Kong, although the mainlanders scorn at the Hong Kongese attempts at Mandarin.

All this is of course well known to the entrepreneurs - they are brilliant businessmen after all. So why do they then plunge into the US market. I think the answer is Vanity. Perhaps their own as well as the vanity of the Chinese government which would like to quote large numbers of Chinese companies being listed in the US. Vanity stroked by greedy investment bankers, is probably the cause of this bull rush. Its a dangerous substance to introduce into the jungle of business. But then, its always been there and perhaps always will be. After all, businessmen are human beings first.

With due apologies to Shakespeare for plagiarising the title of this post. Although he wrote in Hamlet , Frailty, thy name is woman, in popular usage Vanity is often the attributed womanly quality in the quote. As a parting jab at the multitude (?) of incredibly beautiful women who throng this  space :) perhaps that juxtaposition is not entirely misplaced ! I am taking cover !!

13 comments:

  1. The Americans might've invented the car. But it was the Japs who made money selling it. Plagiarism or not..if you belong to a crowd of 1.5 billion..you've the majority opinion in ur side and you can make all wrongs right :)

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  2. Wow, I had no idea this was taking place and it is odd to say the least. I think the motivations are a bit more nefarious than vanity. The sin I am going with, and one you alluded to in the post, is greed.

    China investment opportunities at this moment are like miniature versions of the tech offerings during the net boom. Throughout much of the 90's you could make a fortune manipulating the public's infatuation for tech. The idea and execution could be total crap, but investors ate every IPO up looking for the next Yahoo and Google.

    I think its clear to a lot of us at this point that Wall Street no longer has any resemblance of a soul. It's the only reason I can see for the stubbornness of the price of gold, which logically should be dropping with an improving economy. This all smells to me of the good ole boys on the street getting in bed with some Chinese counterparts in order to take advantage of the investing public's current panic to latch onto China's rising economy.

    To people like you (mainly you) and I, with China knowledge, this almost looks like a practical joke. No way will this work. But a lot of investors aren't going to do their own homework and some unsavory characters know all they have to do is say 'China!', and people will bite. Sad that my opinion of Wall Street has gotten this low.

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  3. @gils - Oh, no doubt at all; the two nations of 1.4 bn and 1.2 bn will rule the markets for sometime to come.

    @Hopfrog - Greed is surely the prime motivator, but what foxes me is that the greed can very well be satisfied by listing in Hong Kong. Your point about the China mania is absolutely valid. Similar to various mindless bubbles, there is the feeling that everything which has anything to do with China must be a huge success. One couldn't be more wrong.

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  4. Now if you are expecting a riposte - tough luck!!

    Vanity is one trait that distinguishes humans from animals - isnt it. If not for Shah Jahan's Vanity, would India boast of Seven Wonder, If not for Lalit Modi's Vanity, would all unknown faces of Ranji Trophy come into Limelite in the IPL, If not for the Vanity of D Markets that made them cost ineffective, that D & E Markets have emerged today.....and on and on.

    Also, it is better that frailty any day. So i think the Juxtaposing was intentionally done to create a more respectable quotation on women.

    So, You dont need to take cover.

    Coming back to your blog... i think Shakespeare answers this in Hamlet itself

    "Every man has business and desire,
    Such as it is." :-)

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  5. Well said Sandhya!

    @ Ramesh - thanks for providing insights into what I did not know at all. Vanity can only feed vanity. But are these companies going to continue in Chinese language? I am neither sure if Americans are going to learn Chinese?

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  6. @Sandhya - Touche. How can anybody score one over you when you can quote Shakespeare back :):)

    @Vishal - There's no chance of it being used outside of China, with all the censorship inherent in them, even if others learned Chinese which is very unlikely. At best, the expat Chinese community, that's all.

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  7. @Vishal, Let me trumpet what Ramesh said. As an American, I can guarantee Americans are not going to learn Chinese. GUARAN-TEE! The culture is already incredibly ethnocentric and the majority of Americans almost take a pathetic sense of pride in not getting to know other cultures. Throw in the incredibly high degree of difficulty in learning Mandarin:

    http://www.pinyin.info/readings/texts/moser.html

    With so much immigration coming from Mexico there was a huge push back in the 80's to become a bilingual culture and Americans couldn't even be bothered to learn survival Spanish. Mandarin, never happen here, and I rarely say never about anything.

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  8. As Goundamani philosophises in one of his repartees, "Arassiyalla idhellaam sagajampa" (In politics, it is all fair) Great lead-in and a good conjecture. No vain, we wane! Thanks.

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  9. "O, what men dare do! What men may do! What men daily
    do, not knowing what they do!" -WS

    Ahem...I mean 'What Chinese Internet Companies dare do.....":-)

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  10. @hema - Touche. I should have known better than to needle a poet :)

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  11. My first ever common stock purchase was one of the companies you listed in this post - SINA. Despite it dropping 10% today, it's still up over 100% from when I bought it late last year. It's like I hit jackpot on my first pull of the slot machine!!

    I agree with you on companies like QIHU and YOKU and RENN (IPOing tomorrow). I think that companies like BIDU and SINA are different stories than some of the smaller names, though.

    I've been particularly captivated with Sina's Weibo micro-blogging service. It's growing at ridiculous rates and is poised to have more users than Twitter within the next year despite being only in China. I might've missed selling at the high point a couple weeks ago, but I'm still liking Weibo's story.

    There was a great discussion on Chinese tech stocks and "China's Second Internet Bubble?" on the the always-insightful Sinica podcast here. Think you'll enjoy this.

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  12. @Mark - Weibo has been a big success and you are right in distinguishing the biggies from the minnows in the Chinese online world. Congrats on the killing with Sina. Maybe there's some value in listing in the US - Sinophiles like you would buy !

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  13. Thanks for the props, Ramesh. Now if only the ideas I've had on other stocks worked as well as that SINA purchase! I'm learning that I by no means have the Midas touch!

    Getting into stocks has been such a good experience for me so far. Am learning so much about business and the way companies work. I can definitely see interest in the stock market being a life-long passion.

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