Bottom line: Zhou Hongyi should be commended for completing his privatization of Qihoo in the face of numerous obstacles, though his plans to re-list his company in China might take at least 1-2 years.
I haven’t always been a fan of security software specialist Qihoo 360 (NYSE: QIHU) over the years due to some of the overly aggressive and often ethically questionable business practices of chief Zhou Hongyi. But I have to admire the outspoken Zhou today, following word that he has reportedly just completed the biggest buyout of a US-listed Chinese company in history despite facing numerous obstacles that seems unsurmountable at times.
Far smaller US-listed Chinese companies have abandoned their plans to privatize due to choppy markets and the difficulty of completing such deals. But Zhou remained steadfast throughout in his desire to privatize his company, with the result that Qihoo’s shares will officially de-list with the start of trade on Monday, July 18, according to new Chinese media reports. (Chinese article)
This particular story has quite a few elements that make Zhou’s accomplishment quite remarkable. It occurred against a broader backdrop that has seen some 40 US-listed Chinese companies announce plans to privatize since the start of last year. Most of those were hoping to quickly re-list in China, on the belief that they could get far higher valuations in their home markets.
Qihoo was once an investor darling in New York thanks to early success for its 2-year-old online search service that posed the first serious threat in years to sector giant Baidu (Nasdaq: BIDU). But investors quickly abandoned the stock after Qihoo couldn’t quickly monetize its search success, causing the shares to lose more than a third of their value from a peak during the euphoria in 2014.
Feeling underappreciated at home, Qihoo joined the privatization train in the first half of last year, in a $9.3 billion deal that was easily the largest among the group of companies trying to de-list. But then China’s stock markets underwent a major correction, and have been highly volatile since then, putting most of the privatization plans in limbo.
Qihoo’s deal was always going to be difficult due to its large size, but it ran into more headaches due to a major unrelated business dispute last summer with Coolpad (HKEx: 2369), its partner in a smartphone making joint venture. Once that clash was resolved, Zhou returned his focus back to the privatization and the deal seemed to be back on track.
Fund Flow Difficulties
But then new reports emerged that the company was running into difficulties moving enough money offshore from China to complete a transaction that required billions of US dollars. Most of those problems arose due to China’s tough restrictions on such offshore transfers, which were designed to control the movement of money into and out of China. A steady decline in China’s currency, the yuan, has added to Zhou’s headaches, making the deal more costly because most of his funds were denominated in yuan.
Zhou seemed to be overcoming all those problems when Qihoo ran into yet another obstacle, this time from China’s own securities regulator. Alarmed at the growing number of companies that were trying to privatize from the US and return home to list, the regulator signaled it would sharply slow or even halt the use of a backdoor listing path that many companies were using due to long wait times for traditional IPOs. That obstacle reportedly prompted Zhou to guarantee returns for his investors backing the privatization if he couldn’t re-list Qihoo within a certain time frame.
Anyone reading this is probably feeling quite dizzy when considering all the obstacles Zhou had to overcome. Any other executive probably would have given up after after encountering just one or two of these obstacles, and Zhou’s ability to complete the deal testifies to his extraordinary persistence. I still have doubts about whether he’ll be able to re-list Qihoo in China as quickly as he would like to. But his remarkable achievement with this de-listing shows that this is clearly a man who makes decisions and then finishes what he starts.
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