Bottom line: Perfect World’s de-listing plan is likely to succeed and could be followed by a merger with Shanda or Giant Interactive, while Renren is likely to also get bought out and de-list by the end of the year.
Perfect World (Nasdaq: PWRD) has become the latest US-listed online game operator to decide it’s unappreciated by shareholders, announcing a plan to privatize and de-list its shares from New York. The management-led buyout offer shouldn’t come as a surprise, as it follows a steady stream of similar moves that has seen peers like Giant Interactive and Shanda Games (Nasdaq: GAME) also leave or prepare to leave the market.
At the same time, another headline from struggling social networking site (SNS) Renren (NYSE: RENN) is fueling speculation of a similar imminent de-listing. That news has Renren announcing the resignation of its CFO — news which should normally have a neutral to negative effect on the company’s stock. But in this case the stock has jumped on the news, indicating investors may think a buy-out offer is coming.
The privatization plan from Perfect World is part of a broader clean-up over the last 2 years that removed many underperforming Chinese companies from New York. The clean-up began 4 years ago when a series of companies were forced to de-list due to accounting irregularities and other listing rule violations. After that, a group of companies like Perfect World voluntarily began to privatize after their growth prospects dimmed due to stiff competition, causing investors to lose interest.
The clean-up has largely finished by now, though there are still a few companies like Perfect World and Renren whose shares have languished these last few years, even as many other Chinese Internet stocks boomed. Perfect World’s shares were down 20 percent last year, though they jumped 22 percent after the buy-out offer was announced. Renren’s shares were down by a similar amount, though they also jumped by a smaller 7 percent on news of the CFO resignation.
Let’s look first at Perfect World, which said it has received a buy-out offer at $20 per American Depositary Share (ADS) from a group led by its chairman. (company announcement) The shares jumped to $19.25 after the announcement, indicating investors are fairly confident the deal will succeed.
I’m also fairly confident the deal will be completed, since Perfect World is a fairly well run company and shouldn’t face any opposition to the plan if it has reliable financing. One potential scenario could see Perfect World combine with Shanda once both companies complete their pending buy-outs. Another could see Perfect World combine with Giant Interactive, which may also be looking for a buyer. Either combination could create a player that may finally have the scale to challenge to industry leaders NetEase (Nasdaq: NTES) or Tencent (HKEx: 700).
Next let’s look at Renren, which simply announced that Huang Hui has resigned as its CFO after 4 years at the job. (company announcement) It named an acting CFO, implying that Huang’s departure was unplanned and no long-term replacement has been found. The sudden departure of a CFO with no named replacement would normally be greeted with either no reaction from investors, or possibly a share price decline over concerns about potential financial problems.
But in this case investors are guessing that Renren’s days as an independent company are numbered, and that a buyout offer is coming soon. I’ve previously said Renren can’t survive in its current money-losing form, and it really does need to find a cash-rich partner that can provide money and synergies to help it survive. With a market value of about $1 billion, Renren would certainly be affordable for a big name like Baidu (Nasdaq: BIDU) or Alibaba (NYSE: BABA), and I do expect that Renren will end its existence as an independent company before the New Year is finished.