BUYOUTS: Irrelevant Mecox Lane Limps Into Buyout Queue
Bottom line: Mecox Lane’s privatization plan should succeed, but the company is likely to continue its decline even if it re-lists in China under its current lackluster management.
The current privatization wave is giving me a chance to revisit some companies that I haven’t written about in quite a while such as former e-commerce superstar Mecox Lane (Nasdaq: MCOX), which has just become the latest name to receive a buyout offer. In a slightly surprising twist, Mecox Lane’s shares tanked after it made the announcement, losing more than 8 percent to close around 20 percent below the buyout offer price.
Mecox’s announcement is one of the smallest so far in terms of deal value, since the company only has a market value of about $40 million. That’s even less than the $63 million education specialist New Oriental (NYSE: EDU) will need to pay an unusual special dividend announced just a day earlier, in a move I interpreted as a signal that the company had no plans to join the exodus of Chinese companies from New York. (previous post)
I do believe that big names like online search leader Baidu (Nasdaq: BIDU) and travel giant Ctrip (Nasdaq: CTRP) should stay in New York, as these companies are large enough and have good enough growth prospects to attract US investor attention. But names like Mecox Lane don’t seem like a good fit for New York due to their small size and Chinese roots, and are probably better off leaving.
According to Mecox’s announcement, a buyout group has offered to purchase all of the company’s American Depositary Shares (ADSs) for $4 each, representing a 12.5 percent premium over their last close before the offer. (company announcement) I’m honestly not sure why the shares tanked so much after the announcement, since the deal is almost certain to get done.
After all, the size of the deal is tiny, and the buyout group already owns 64 percent of Mecox Lane’s shares. So perhaps there’s a potential obstacle that’s unknown to me. Otherwise, the stock could represent a bargain for investors who have ignored it for years due to the company’s failure to seize on China’s e-commerce boom.
Former Superstar
Mecox Lane was actually one of China’s earliest e-commerce companies to go public, and was riding high when it received a big investment from leading web portal Sina (Nasdaq: SINA) in 2011. Its shares soared to as high as $85 at one point, giving it a market value of more than $1 billion.
But it failed to take advantage of its early start in e-commerce, and its stock plummeted and has traded mostly in the $2-$6 range for the last 3 years. It reported just $12.5 million in revenue for its latest quarter, and has become mostly an afterthought in a market dominated by big names like Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD) that report hundreds of millions of dollars in quarterly revenue.
Mecox certainly isn’t the only company to get left behind after an early promising start. The other notable example is Dangdang (NYSE: DANG), which hasn’t fallen quite as badly as Mecox but is still nonetheless quickly fading into irrelevance. Like Mecox, Dangdang has launched its own privatization bid and will likely attempt to re-list back in China. (previous post)
Both Mecox and Dangdang, as well as many of the other smaller companies trying to privatize, are victims of the same problem, namely the hubris of their founders. Most of these smaller companies are headed by fiercely independent entrepreneurs who refuse to sell their companies or step down from the chief executive’s job even when they’re clearly past their peak.
Perhaps some of these entrepreneurs have finally learned their lesson and will sell their companies to better-run rivals after they privatize. But I suspect that most will try to re-list in China without any major management changes, and their founders will continue as captains of these slowly sinking ships until they finally go under.
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