IPOs: Scandal Pressures Momo’s Shrinking IPO

Bottom line: Dwindling investor appetite will result in a weak debut for Momo’s upcoming IPO, which may also get negative publicity as it gets caught in a minor scandal in its home China market.

Momo pares back IPO target

Mobile social networking service (SNS) provider and IPO candidate Momo Inc has become a regular feature in the Chinese headlines these last few days, but for all the wrong reasons. The company was in the news late last week when it slashed the size of its planned New York listing, and is now back with a fresh set of headlines on a scandal involving crooked business dealings. This certainly isn’t the kind of publicity a company wants on the eve of its IPO, which was set to price and debut either this week or next. There’s really not much room for Momo to delay the plan without falling into the Christmas holiday lull, meaning its debut could fizzle due to the stream of bad news.

More broadly speaking, Momo’s troubled listing could signal that a year of bullishness towards Chinese Internet companies may finally be slowing, meaning Momo may be one of the last Chinese names to list in a window of strong sentiment that culminated with Alibaba’s (NYSE: BABA) record $25 billion IPO in September. The market already needs a rest from this steady stream of new listings, after absorbing around $30 billion in new China tech shares this year — most of that from Alibaba.

We’ll look at the newest scandal involving Momo shortly, but first let’s review the latest status on its IPO. The company made the first public filing for its listing plan last month, saying it could raise up to $300 million. (previous post) But investors weren’t so enthusiastic about the company, and now Momo has scaled back the plan by more than 20 percent with a maximum target of $232 million. (English article)

New reports include the latest terms for Momo’s American Depositary Shares (ADSs), including a price range of $12.50 to $14.50, which would give it a market value of about $2.7 billion at the midpoint. Alibaba, which is one of Momo’s major backers, plans to purchase $10 million in IPO shares and additional stock worth another $50 million in a concurrent private placement at the time of the listing.

The weak demand that forced Momo to sharply reduce its fund-raising target was already bad news, but now the company is getting a new round of negative publicity in the mainstream Chinese media due to a separate scandal. That particular story began when a couple of young filmmakers made a popular video using aerial footage taken from a camera tied to a balloon. (English article; Chinese article)

Momo and leading online video site Youku Tudou (NYSE: YOKU) approached the pair about collaboration on a video advertisement based on the concept, but then later told told them it was scrapping the plan due to financial problems. But the companies actually went ahead and used the concept to make their own video, which was later discovered by the original filmmakers on Momo’s service. One of them wrote a long letter of protest, which went viral on the popular WeChat instant messaging service, prompting Youku Tudou and Momo to say they would investigate the matter and stop promoting the video.

This pair of news stories nicely exemplify the 2 very different worlds that US-listed Chinese Internet companies live in. One of those is on Wall Street, where these companies are mostly just names and lots of financial information for US investors; the other is China, where they are real operating businesses that sometimes get tangled up in this kind of scandal. Luckily for Momo, Wall Street investors don’t seem to pay much attention to the China-based scandals too much. But in this case it does seem likely the IPO will debut weakly due to dwindling investor appetite, and the scandal could further dampen demand.

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