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Common grounds08/02/2006. Source: Asia Private Equity Review (APER).
 China and the US companies are in a bind as economic disparity between these two super powers narrows, says the Asia Private Equity Review.
It was an auspicious beginning in the second half of 2005 for the Asian private equity industry. In the technology skies of both China and India, two of Asian private equity industry's most favoured investment destinations by number of deals (fig. 5), there were spectacular displays of fireworks. In the latter, it was the sale of Citigroup's private equity holdings in iFlex Solutions to Oracle for a staggering US$593 million, enlisting the transaction as one of the most profitable divestments in Asian private equity records. But it was the stories of two China portals that gripped the attention of global investors.
In August, Baidu.com, China's Google, made its debut on NASDAQ. The share rocketed to close at US$122.54, a price of more than 2,450 times of the portal's 2004 earnings per share. No other technology company's listing has received such an overwhelming response from investors since the internet heydays. Before the global internet industry had a chance to digest Baidu.com's stunning success, Yahoo announced its partnership with Alibaba.com, China's leading e-commerce company with a deployment of US$1 billion.
In the borderless information technology space, especially in the internet arena, the movement between China and US-based portal companies is growing at a rapid pace. The development highlights the intertwining fate of these companies on both sides of the Pacific, as they seek to attain global dominance. In this unique phase of development of the technology cosmos, private equity is the catalyst.
Blessed by Private Equity
Since 2000, there are altogether 17 Chinese portal companies that have either successfully listed on the NASDAQ or sold a portion of their equity to strategic investors based in the USA. (fig. 6).
Out of these 17 companies, 11 of them were listed on NASDAQ and raised an aggregate US$938.7 million. The other six attracted US$1.36 billion from foreign investors via complete or partial divestments. Through these two medium, they have successfully secured no less than a total of US$2.3 billion. It is of interest to note that virtually all of these 17 portals have earlier received funds from private equity houses, providing them not only the life blood for their young operations, but ultimately the passport to the global stage.
The corporate history of five-year old Baidu.com is exemplary. Last year, China's home grown and independent online search engine took steps to bolster its capital base while preparing to enter the international space. It raised US$15 million from a number of private equity investors. From the US were Draper Fisher Jurvetson e-Planet Ventures, Integrity Partners and Peninsula Capital while CMT China Value Capital Partners is a China-based fund management firm, as well as Singapore government's Venture TDF Technology. Also included in this round of financing was the company's US counterpart, Google.com which contributed US$5 million.
In late September last year, 51job.com rose to stardom overnight following its successful debut on NASDAQ. Backed by Silicon Valley's Doll Capital Management which provided US$8 million to the online recruitment firm back in 2000, 51job.com's share price closed at US$54 each, a towering 3.6-fold increase compared to its offer price of US$14 (fig.7).
Although Shanda Interactive Entertainment ('Shanda') did not encounter feverish response from investors on its first day of trading in May last year, the online game operator made history by becoming the first Chinese enterprise to hold the title of the best performing company on NASDAQ for the year 2004. Shanda's success on NASDAQ has not only propelled it to be a formidable force in China's online game players, but it was also SAIF Capital's prized investment. In 2003, SAIF Capital through its Softbank Asian Infrastructure Fund injected US$40 million into Shanda. The private equity house subsequently returned over US$481 million to its coffers, including the original invested capital.
Global Road Map
For US-based online operators, there is a general recognition that gaining a foothold in the Middle Kingdom is not only a necessary credential to global dominance but is also a pressing priority. Since 2001, a number of well-known US-based online operators have made strategic moves into China. Interestingly, private equity backed China-based portals have been the favourites in their targets (fig.8). Nonetheless, their thrust to the East is a telling statement that the Sino puzzle in the global economic scene cannot be ignored.
As early as 1999, AOL, a pioneer in the internet space, teamed up with Lenovo (then known as Legend Computer) in setting up a US$200 million joint venture. But the collaboration concluded three years later and AOL left the China market in 2002.
eBay, the world's largest online auctioneer, soon joined AOL's trail and arrived Asia. It chose Japan as its maiden stop. Its five-year long Asian expedition is a case study of setbacks and uncertainties. China will ultimately define eBay's global position.
The online auction company entered the China market in 2002 when it completed its final phase of acquiring Eachnet.com. Altogether, eBay deployed an aggregate US$180 million to take over Eachnet.com. Like many internet companies, Eachnet owed its genesis to venture capital. It received its seed capital from JH Whitney and AsiaTech Ventures in October 2000. eBay's entry into the China market coincided with its withdrawal from Japan where Yahoo Japan was the dominant force. The joint venture online operator in which Softbank Corp. remains the local partner held 95% of Japan's online auction market, then trading goods worth US$1.6 billion. In disconnecting the wires of its Japan operation, eBay admitted that its entry to Asia's largest economy was too late. Following this sombre experience, eBay was resolute to be an early arrival in China's portal market.
In an interview with the Wall Street Journal in February this year, Ms Meg Whitman, chief executive of eBay affirmed her company's determination to conquer the China market. She was quoted in saying that China is a "must win" market. In the 12 months of 2005, eBay will spend US$100 million to further strengthen its presence in the world's most populous nation where internet usage has become prevalent.
A year after eBay has entered the China market, Yahoo arrived through the acquisition of the Hong Kong-based 3721 Network Software ('3721') which was China's number two internet search engine. It had earlier received funds from JAFCO Asia. However, 3721 could not be regarded as an immediate or direct challenge to eBay's position. This landscape changed in August when Yahoo decided to strengthen its presence in China's burgeoning online market and join hands with Alibaba.com to conquer the China market.
Describing itself as the world's largest online marketplace for both international and domestic China trade, Alibaba.com also operates AliPay, China's most popular online payment system rivaling PayPal, the payment company acquired by eBay in 2002.
Yahoo took a bold move. It agreed to pay US$1 billion and inject its China operators into Alibaba.com. The transaction will allow Yahoo a 40% equity position in the enlarged Alibaba.com, valuing the latter at US$4.5 billion. For the six-year old Alibaba.com, the lofty valuation coming from the Yahoo transaction could not have materialised without a series of funding from venture capital investors. When it commenced its operation in 1999, Alibaba.com received funds first from Transpac Capital, Investor AB and subsequently from Fidelity Capital, Venture TDF Technology and the US-based Granite Global Ventures.
Observation
As China's economic reform journey leads to the country becoming a larger contributor in the world economy, understanding international practices and working with world players is a necessity for its aspiring corporations if they were to effectively compete on the global platform. In the past few years, China's enterprises have quietly assumed presence abroad. At the end of 2004, there were 5,163 Chinese companies that have channelled an estimated US$45.9 billion to more than 149 countries worldwide.
For China's portal operators, however, USA is their answer, at this juncture. In the land where the eagles fly high, having an address at NASDAQ or an alliance with the world acclaimed US-based technology icons is the permit to the global horizon. On the other hand, their counterparts in the US view securing a partnership with China's home grown portals as a first and necessary step in becoming a dominant player on the world stage. In their grand dreams, private equity is the fairy godmother.
(The above article was based on feature article published in Greater China APER's August 2005 issue, a sister publication of ASIA PRIVATE EQUITY REVIEW, the first private equity journal, published in Chinese language, that analyses trends in the Greater China region).
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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