Big Investors Lose Taste For Pactera, Youku

Blackstone, Temasek give thumbs down to Pactera, Youku

Two Chinese tech leaders are feeling the effects of fickle western institutional investors, with word that one big name has lowered its buyout offer for IT outsourcing firm Pactera (Nasdaq: PACT) , while another has dumped its sizable stake in video sharing site Youku Tudou (NYSE: YOKU). In the former case, it’s private equity giant Blackstone that’s lowered its offer for Pactera, while in the latter its Singaporean sovereign wealth fund Temasek  dumping its Youku Tudou stake. Both cases are due to company specific factors; but they also show that big-name investors may carry a certain level of prestige for companies that attract them, but they also bring a certain level of risk.

That risk was apparent in Pactera’s share price, which predictably slipped nearly 5 percent after the news came. Youku Tudou’s shares initially slipped by a similar amount, but later rallied and actually closed up nearly 9 percent on the day. Both Blackstone and Temasek are considered long-term investors, so many could interpret their negative moves as reflecting some downside for both companies in the months ahead, despite the rally for Youku Tudou shares.

Let’s start with a look at Pactera, which received its initial buyout offer from Blackstone back in May at $7.50 per American Depositary Share (ADS), representing a 43 percent premium to its share price at the time. (previous post) Now media are reporting that Blackstone has lowered its offer to $7 per share, citing Pactera’s weakening financial performance. (English article)

At their current price of $6.47, Pactera’s ADSs still trade well below the new offer price. That means investors are far from certain the deal will ultimately close at the lowered price, and may think the buyout will ultimately fall apart. Pactera and peers like Camelot Information Systems (NYSE: CIS) once looked like hot companies, poised to become China’s equivalent of Indian outsourcing giants like Infosys (Mumbai: INFY). But they never quite realized their potential due to intense competition, and this latest vote of no confidence by Blackstone seems to indicate they may never become major global players.

From Pactera, let’s move on to Youku Tudou, which lost a major stakeholder when Temasek sold some 7.7 million of the company’s ADSs at $23.80 apiece, raising $185 million. (Chinese article) The sale price represented a 3.3 percent discount to Youku Tudou’s previous close before, which sparked the initial sell-off in the company’s shares after the news came out.

Like Pactera, Youku Tudou is in a very competitive space, in this case video sharing. But unlike Pactera, Youku Tudou is losing money and has given no indication of when it might become profitable. In addition, many of Youku Tudou’s rivals are getting acquired by bigger, profitable Internet firms, with Baidu (Nasdaq: BIDU) making one recent major purchase and Alibaba reportedly near another one.

That leads me to guess that perhaps some investors are hoping a potential acquirer purchased the Temasek stake with an aim of eventually buying the whole company. Based on its market value of about $4 billion, the Temasek stake would have accounted for a relatively small 4 percent of Youku Tudou’s shares, meaning any acquirer would still have a spend a lot more money to buy the company.

For anyone hoping for such an acquisition, I have to give my own view that chances for such a deal are slim, since CEO Victor Koo desperately wants to show the world he can make Youku Tudou into a profitable company. It’s still possible Youku Tudou could sell a smaller strategic stake in itself to another investor, though I doubt we’ll see that in the next few months. In the meantime, look for the company’s shares to pull back in the next few weeks as Youku Tudou shows no signs of turning profitable anytime soon.

Bottom line: A buyout offer for Pactera could collapse due to its weakening business, while Youku Tudou shares are likely to pull back following a major stake sale by Temasek.

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