Dividend Plays

[xxrayeyes]

This Management Wants Investors' Money, Not Their Opinions

Published: December 12, 2003

Call it shareholder democracy, Chinese style.

The hottest initial public offering in three years hit the market this week, with many features to stir nostalgia in those who miss the bubble.

It's an Internet company, whose buyers think it is destined for great wealth from selling things online. And it even has some profits.

But this company has more. It is a China play, whose underwriters at Merrill Lynch had the good timing to take it public on the day President Bush greeted Wen Jiabao, China's prime minister, at the White House and sided with the Chinese government in its opposition to allowing Taiwan's voters to express their opinions in a referendum.

The company is Ctrip.com International, the largest consolidator of hotel rooms and airline tickets in China. Its share price leaped 89 percent in Nasdaq trading on Tuesday. Thomson Financial reported that was the best first-day showing for an initial public offering in three years.

Ctrip's contribution to convenient democracy is detailed in its prospectus. Buyers of the American depository shares are told they "may instruct the depositary of our A.D.S.'s to vote the shares underlying your A.D.S.'s but only if we ask the depositary to ask for your instructions.''

"Otherwise," it adds, "you will not be able to exercise your right to vote unless you withdraw the shares. However, you may not know about the meeting enough in advance to withdraw the shares. If we ask for your instructions, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the shares underlying your A.D.S.'s are not voted as you requested."

There is not even a promise that the company intends to try to ask for votes from foreigners.

On second thought, it may be unfair to blame the Chinese for this approach to democracy. After all, China Life, a pending offering from the country's largest life insurance company, has no such undemocratic provision.

Ctrip, by contrast, does all its business in China but is incorporated in the Cayman Islands. And its largest shareholder is a fund run by the Carlyle Group, the Washington-based private equity firm known for hiring former government officials who understand how inconvenient democracy can be. Former President George H. W. Bush resigned as a senior adviser in October, but Carlyle's masthead still includes James Baker, the former secretary of state, and John Major, the former British prime minister.

A Carlyle spokeswoman declined to discuss the voting arrangements at Ctrip. And a spokesman for the Nasdaq stock market said that the exchange yields to foreign laws when evaluating whether to list overseas companies.

In a less enthusiastic market environment, investors might wonder why Carlyle was willing to sell some of its stock in September for half the public offering price and more shares at the offering itself. All told, Carlyle has taken out $12.5 million, plus stock, in a hotel company. And even with the share price slipping a bit since the first day, its remaining stake in Ctrip is worth $100 million.

Carlyle, by the way, is assured of being able to vote its remaining stake. And so are the company's other insiders. Only those who paid the most may not get to vote.