SCMP; China Portal Mergers Article
Saturday, April 28, 2001
China portal mergers halted by ego and politics
REUTERS
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Too many Chinese portals are chasing too few advertising dollars, but egos, political uncertainties and a lack of foreign buying interest have all but thwarted consolidation in the sector, analysts said on Friday.
"It's been much slower than anyone would have anticipated," said Rajeev Gupta, an Internet analyst at Goldman Sachs.
China's top three portal firms, Sina.com , Sohu.com and Netease.com, all listed on Nasdaq last year with dreams of attracting millions of eyeballs. Now they are all trading near all-time lows and have low cash reserves.
Market watchers said they expected a global player, such as media giants AOL Time Warner , Yahoo, or software giant Microsoft to scoop up one of the portals at a depressed price to stake a claim in China's market.
Chinese personal computer giant Legend Holdings and still cash-rich Internet group chinadotcom have also been rumoured to be looking at Chinese portal firms.
But it appears that few see a bargain in the struggling consumer Websites - none of which expects to break even until at least 2003 - despite the involvement of investment bankers in some cases.
New economy, old censorship
Political concerns may be one of the problems.
"They've got Nasdaq investors and Nasdaq reporting requirements, but they're still Chinese companies operating in a Chinese political atmosphere," said one source in the portal business.
The Government in Beijing censors news and forbids pornography and certain kinds of political and religious material on the Internet, so portals have to be careful.
"These are the only media companies in China that are not owned by the government," the businessman said.
All three portals censor their own chat rooms and the government has grown to trust their managements, which could make a takeover by a foreign media company - and a potential change of management - difficult, he said.
Credit Suisse First Boston Internet analyst Matt Adams said a foreign owner might be viewed differently by the Chinese Government than a collection of passive Nasdaq investors.
"If the majority of shares are held by Fidelity and Mrs. Smith in Alabama, that's a big difference in my mind from Rupert Murdoch or Microsoft," Adams said. Murdoch is chief of media giant News Corp Ltd .
Merging egos
Consolidation among portals is inevitable because China does not have enough advertising spending to support all of them, said Stephen Moss, head of the Asian unit of Internet advertising company DoubleClick Media .
An executive at one of the top portals said it was possible consolidation would come in the form of a merger between two of the three top portals.
"I think that something - either a merger or an acquisition - will have to happen, but it's still about three to six months down the road," the executive said.
But another industry watcher said a merger would be a very bitter pill for the acquired company, which would probably be forced to forfeit its brand and surrender control to the buyer.
"You have founders of these organisations who have big egos," said the portal business source. "They have become the public faces."
A merged giant would also face pressure from shareholders to cut jobs and reduce spending because revenue growth would not be a likely byproduct of the combination, analysts said.
Global players under pressure
Sohu CEO Charles Zhang won't rule out being acquired, but said his firm has "more options" after the sale of Intel Corp's 8.6 per cent stake in the portal to Chinese Software firm Beida Jade Bird. The deal revealed local interest, he said.
Foreign acquisition - as in February when Lycos Asia, a unit of Terra Lycos SA , bought Hong Kong-based Chinese-language portal MyRice.com - might have been slowed by the sharp share price falls of U.S. Web giants this year.
"The likely global players that would be coming in are under pressure themselves," Adams said.
Waiting too long for a "white knight" could render China's top portals vulnerable to the entrance of a cash rich foreign giant, such as AOL or Yahoo.
Goldman's Gupta said that despite their strong brand names in China, the three portals had little to gain by waiting.
"If they continue to be complacent, they'll be obliterated," Gupta said.
" Success seems to be largely a matter of hanging on after others have let go." ~ William Feather
