Archive for the China Category

Baidu: “We’ve Seen This Movie Before”

Posted in China, Deals, Digital Media, Investment Banking, Media, News with tags , , , , , , , , , , , , , , , , , on August 11, 2005 by Dave Liu

I was interviewed for the following article which was written by Steve Rosenbush and published by Business Week on August 11, 2005.

Investors hope it’ll be another Google, says China tech banking expert David Liu. But he warns that it’s “hard to pick winners in tech” The initial public offering of Baidu (BIDU ), the Chinese Internet search company, shattered records on Aug. 4. It was the most successful Nasdaq IPO in five years, rising from $27 to $154. While the stock price has settled back at $91, the company has recast the perception of the Chinese Internet market. Valuations of Internet companies, and search companies in particular, are on the rise.

Now, big players from the U.S. are pouring into the Chinese market. Google (GOOG ) has a stake in Baidu. Yahoo! (YHOO ) is said to be in talks with e-commerce site Alibaba, eBay (EBAY ) has acquired Eachnet, and MSN has its own operations in China (see BW Online, 8/11/05, “There’s More Where Baidu Came From”).

David Liu, managing director of China tech banking at Jefferies & Co., expects valuations to keep rising in the wake of the Baidu IPO. He spoke about the Chinese tech market with BusinessWeek Online Senior Writer Steve Rosenbush. Here are edited excerpts of their conversation.

Q: How would you characterize Baidu’s valuation?

A: By any conventional standards, the valuation looks very high. Its valuation is higher than Yahoo, Google, or eBay. To justify this valuation, Baidu needs to grow faster than Google.

Q: Why did Baidu’s value reach its current level?

A: The valuation of Baidu was driven by a “perfect storm” of investment conditions. There haven’t been that many IPOs, and the market is starved for good growth ideas.

Lots of investors have been kicking themselves because they didn’t buy Google when it was in the 80s. It’s 300 now. We’re also seeing rapid growth of the China market. It’s a very large opportunity. It’s the second largest Internet market in the world, and over the next two years, pundits believe, it will become the largest Internet market in the world.

The valuation of Baidu was also driven by the rapid growth of online advertising and revenues related to search. And the nice thing about Baidu is we’ve seen this movie before — in the U.S. Everyone believes the same movie is going to play out in China and that Baidu will do as well as Google.

Q: But is the current valuation justified?

A: The company hasn’t disclosed forward-looking revenue numbers. The analysts who worked on the deal are in a quiet period, and we won’t see anything from them until 40 days after the IPO, or early September. Those reports will show their view on Baidu’s projections. Once the numbers come out, we can figure out whether the company’s projected growth justifies its current valuation.

Q: How will the Baidu valuation alter the outlook for M&A and IPOs in China?

A: There’s no doubt the Baidu IPO will affect companies that are in a related space, like Alibaba. Any Chinese search company today is going to look at the Baidu situation and start thinking more about launching an IPO than pursuing an M&A.

Baidu will have an effect on the broader market, too. There are only 30 China-based tech companies on the Nasdaq. That’s a very small sample, so every single deal has a meaningful impact on expectations. If you’re a China-based tech company looking to sell or go public, an event of this magnitude heavily skews that sample and what you think the value of your company is. In my opinion, the Baidu IPO pushes valuations beyond the point where many M&A deals can get done.

Baidu clearly affects companies with one degree of separation — those that are rivals of Baidu. And it affects the valuation of Internet companies, or companies with two degrees of separation. They will argue that they make their money by monetizing traffic, just like Baidu.

Tech companies, which have three degrees of separation, will argue that they’re tech market leaders, just like Baidu and deserve a similar valuation. And companies with a fourth degree of separation, which operate beyond the tech market, will argue that they deserve a valuation comparable to Baidu, too. But I think these arguments lose credibility unless the company is a search company or an Internet company.

Q: Can you be more specific about how Baidu will change the outlook for M&A and IPOs in China?

A: Baidu will have the biggest impact on search companies like Sina and Zhongsou, which compete directly with Baidu. It also may have an effect on companies like Alibaba, the b2b site. While Alibaba may be in talks with Yahoo, it’s unlikely to sell out entirely. It may sell a piece to Yahoo, then go public, just as job site eLong sold a piece to Barry Diller’s IAC/Interactive before it went public. [eLong was acquired by Interactive and is now part of spinoff Expedia.]

We’ll see more two track deals like this. M&A is difficult in any market growing this fast because the seller thinks it’s going to keep growing like crazy, and the buyer thinks expectations are too high.

Other companies on the cusp of M&A or IPO include China HR, the job site. Rival job site 51job (JOBS) went public last year. It was the second-best performing IPO on the Nasdaq. Another job site, Zhaopim, may also be close to IPO or deal. The same is true for Soufum, the real estate site. But once you get beyond search and Internet sectors, the influence of the Baidu IPO really starts to wane.

Q: Is there a danger that an M&A/IPO bubble is forming in the China market?

A: Valuations are based on a company’s future growth. If these companies perform well, the valuations will be justified. If they don’t, valuations will come down. That’s why quarterly performance is so important. These kinds of businesses are so new in China.

But there will be a new Google, a new Yahoo, and a new Microsoft that comes out of China. And these market leaders will justify their valuations. But these companies are relatively small, and it’s hard to pick which ones will be winners. That’s why investors get paid so much money. It’s particularly hard to pick winners in tech, which tends to be a winner take all market.

Q: Will Baidu be a winner?

A: It has the lead right now, but someone else could come along. Google wasn’t the first search company in the U.S., or even the second or the third. And most of those early leaders aren’t around today.

There’s More Where Baidu Came From

Posted in China, Deals, Digital Media, Investment Banking, Media, News with tags , , , , , , , , , , , , on August 11, 2005 by Dave Liu

I was interviewed for the following article which was written by Brian Bremner and Justin Hibbard and published by Business Week on August 11, 2005.

The search engine’s runaway stock may spur Chinese Net IPOs — and rein in M&A as companies’ ideas of their own valuation soar How do you say feeding frenzy in Chinese? The moon shot of an initial public offering by Chinese Internet search engine (BIDU ) — whose $27-a-share launch on Aug. 4 jumped fivefold, to $154, before settling back to around $90 — shattered a five-year record for the best debut on the Nasdaq. It tapped into a deep investor hunger for the next Google (GOOG ) — which has seen its shares triple in the past year — and a desire to profit from the Internet in China, where some 100 million people now go online.

So will Baidu’s success unleash a flood of China Net IPOs? There’s good reason for excitement. Broadband subscribers in China last year more than doubled, to 43 million, and Beijing technology research firm BDA China is forecasting the online advertising market, worth $208 million in 2004, will expand to nearly $1 billion by 2009.


Although the stampede into Baidu is partly based on the search engine’s similarity to Google, it also reflects optimism about that potential growth. That’s why many analysts are bullish on Chinese Internet companies. “We will see an expansion of the valuations. Baidu helped that,” says Piper Jaffray analyst Safa Rashtchy.

Indeed, some Chinese tech companies that have been considering a flotation might now jump in. “Given the success of Baidu, I’m sure some other Google look-alikes will be inspired to [do an] IPO,” says Khiem Do, head of Asian equities at Baring Asset Management.

At the same time, Baidu’s offering could put a damper on a wave of mergers and acquisitions among Chinese Net companies that had been picking up. Yahoo! last year paid $120 million for control of Beijing 3721 Technology Co., and it now appears to be close to a $1 billion deal to buy a one-third stake in, an online marketplace for small and midsize Chinese companies.


And in February online game pioneer Shanda Interactive Entertainment bought a 19% stake in portal After Baidu’s performance, however, Chinese Net entrepreneurs may believe their companies are worth more than potential acquirers are willing to pay. “The Baidu IPO pushes valuations beyond the point where many M&A deals can get done,” says David Liu, a managing director at investment bank Jefferies & Co. (see BW Online, 8/11/05, “Baidu: “We’ve Seen This Movie Before””).

All this doesn’t mean Baidu truly warrants its own sky-high valuation. Baidu, co-founded five years ago by former Infoseek engineer Robin Yanhong Li, is the mainland’s No.1 search engine, with 45% of the market. But the company earned just $1.45 million on $14 million in sales in 2004. At $90 per share, Baidu’s market capitalization is nearly $3 billion — which values it at more than 1,800 times 12-month trailing earnings, compared with price-earnings ratios of 70 or so for Google and Yahoo.

And Baidu faces intense competition. Its rivals include well-heeled U.S. search providers such as Google (which owns 2.6% of Baidu), smaller Chinese search sites, e-commerce players like Alibaba, and portals Netease, Sina, and Sohu. “We are in the realm of crowd psychology,” says Duncan Clark, BDA’s managing director.


Investors might also note that the record of Chinese Net stocks has been mixed. Of the 10 Chinese tech companies that went public last year, 7 are trading below their offering price. Online 51job Inc., which went public at $14 in September, 2004, zoomed to $55 before falling to its current $13.

The one exception: Shanda Interactive, the best-performing stock on the Nasdaq last year. It went public in May, 2004, at $11 and now trades at $37.50, up 241%. Although Baidu’s IPO boosted some of the laggards, they quickly fell back to where they were before the IPO. In a feeding frenzy, it seems, someone always gets bitten.

China’s Global Urge to Merge

Posted in China, Deals, Investment Banking, Media with tags , , , , , , , , , , , , , , on July 27, 2005 by Dave Liu

I was interviewed for the following article which was written by Steve Rosenbush and published by Business Week on July 27, 2005.

Acquisitions and international investment holds the key to high wages, job growth, and productivity — all crucial to domestic tranquility Just a few weeks ago, it appeared that two Chinese companies were on the verge of making significant acquisitions in the U.S. Now, both deals are in peril. China-based appliance maker Haier (HRELF) appears to have dropped out of the bidding war for Maytag (MYG) in the face of a higher offer from Whirlpool (WHR). And China National Offshore Oil’s bid for energy company Unocal (UCL) has stalled in Washington, where political sensitivities over natural resources always run high.

Nonetheless, China remains poised to become a major player in the global mergers-and-acquisitions scene. Driven by fundamental economic and political needs, companies based in China will likely attempt larger deals over the next few years, especially in the technology arena.


The primary driver of China’s M&A scene is social and political in nature. Beijing is worried about the prospects for political unrest. John Rutledge, a former economic adviser to President Bush, says disturbances and even riots in China are more common than many people in the West understand. While the Chinese leadership may not have to run for reelection, “it knows it can’t hold onto power without raising the standard of living,” says Rutledge, who now runs Rutledge Capital.

Despite China’s stunning economic growth during the past few years, the economic boom has yet to reach rural areas, where most of the country’s 1.3 billion people live. Wages in the industrialized coastal cities, where about 300 million people reside, have been growing 10% to 20% a year and total the equivalent of about $3,300 annually, according to David Liu, managing director at investment banker Jefferies & Co.

Liu says wages among the 1 billion people who live in the interior add up to about $352 a year — approximately one-tenth of what workers in the cities make in trades such as construction.


Through M&A, China can not only create economic growth but also help boost employment growth and raise wages. One part of that strategy involves Chinese companies buying troubled U.S. ones such as Maytag. With wages in China so much lower than those in the U.S., such deals also allow Chinese management to return broken-down U.S. companies to profitability, according to Liu.

But that game can only be played for so long. Wages in China will rise over time, and other low-cost centers of manufacturing, such as Indonesia or various states in Africa and the Middle East, will emerge.

To maintain its competitive advantage, Chinese companies must acquire technology that will make the country more productive — the real key to improved living standards.


That was the thinking behind Chinese computer giant Lenovo’s purchase of IBM’s (IBM) PC division earlier this year (see BW Online, 5/9/05, “Lenovo and IBM: East Meets West, Big-Time”). It wasn’t for the brand, which Lenovo only can use for a few years. It was all about the technology, according to Liu, who heads up the company’s China business.

Bigger tech deals are on the way. “Chinese companies need to acquire top-tier technology in the U.S. and Europe. Buying second- and third-tier companies doesn’t really help, because they don’t boost productivity. What they really want to buy is Intel (INTC),” Rutledge says.


The process doesn’t have to occur overnight. Chinese leaders in business and politics, unencumbered by democratic elections and quarterly earnings expectations, can afford to wait more patiently than their counterparts in the U.S. And a lot can change in five years. The Lenovo deal would have been unthinkable five years ago.

China certainly possesses the financial wherewithal to make it happen. With $750 billion in liquid securities, the government has plenty of cash on hand. And the revaluation of the renminbi will strengthen the value of that currency in relation to the dollar, making it easier for Chinese companies to buy assets in the U.S. (see BW Online, 7/26/05, “China’s Revaluation: Don’t Fret”).

Formidable roadblocks to big-tech deals would exist. CNOOC’s Unocal bid has triggered a review in Washington that could drag on for the rest of the year, or longer. And it’s not clear that Unocal, which has a large percentage of its oil reserves in Indonesia, not the U.S., is really so crucial to U.S. strategic interests. The political opposition to a takeover of a major U.S. tech company may prove even greater.


For now, Chinese companies will focus on more achievable goals, such as buying smaller and midsize tech companies. Liu participated in two such deals, including the sale of software maker Ross Systems to Hong Kong’s CDC Corp. (CHINA) in 2004.

Jefferies also sold Audiovox’s (VOXX) cell-phone division to UTStarcom (UTSI) last year for $165 million. While UTStarcom is based in Alameda, Calif., it does much of its business in China.

Such deals are fairly easy to close, assuming that the principals observe a few guidelines, according to investment banker Jeff Williams, principal of Jeff Williams & Co. Chinese companies need to pick U.S. targets carefully — deals that involve companies in aerospace and defense are still impossible to contemplate. But China is hardly alone in that regard. For now, only companies based in a few countries such as allies like Britain, France, and possibly Italy or Germany have a shot at making acquisitions in this area.


China’s leadership will ultimately do whatever it takes to ensure a rising standard of living. And if China wants access to the top-tier technology that will boost productivity and growth, it may very well have to expand political freedoms at home to win approval of deals abroad.

Regardless of who ends up owning Maytag or Unocal in the short term, China’s emergence as a power player in the M&A market is only just beginning.