VIDEO: Xunlei Founder Resigns as CEO, Sale Coming?

Bottom line: The resignation of Xunlei’s founder as CEO, even as he retains his chairman’s title, could indicate a sale is coming soon, with the most likely buyer as Xiaomi.

Big shifts happening in Xunlei boardroom

The incredible shriveling online video company Xunlei (Nasdaq: XNET) is making a tiny splash in the headlines as we head toward the weekend, with word that its founder is relinquishing his position as CEO. The move seems potentially significant, since one of the main obstacles that keeps more companies from being acquired in China is resistance by their founders to relinquish their “empires” to someone else.

In this case, Xunlei’s empire is rapidly vanishing, as it gets overtaken by larger rivals like Baidu’s (Nasdaq: BIDU) iQiyi and video services operated by Tencent (HKEx: 700) and Sohu (Nasdaq: SOHU). That may mean that no one really wants Xunlei anymore, including ordinary stock investors. The company’s shares have been on a downward trajectory since its Nasdaq IPO three years ago, and now trade at $3.24 apiece, about a quarter of their IPO price of $12.

Despite its attempts to distinguish itself from its peers by focusing on technology rather than a provider of consumer services, Xunlei clearly isn’t doing a great job. Still, there may be some value to one or two existing players that might want to buy the company for cheap, most notably struggling smartphone maker Xiaomi, which is one of Xunlei’s major stakeholders with 28 percent of the company.

We’ll return to the buyout questions shortly, but first let’s review the latest announcement from Xunlei, saying that founder Sean Zou is relinquishing his CEO title to Chen Lei, who will also become a director of the company’s board. (company announcement) We should also point out that Zou will retain his post as company chairman, though the announcement doesn’t state specifically whether he will be an executive chairman.

It does contain a hint on Zou’s future role at the company, saying he will focus on Xunlei’s growth strategy and initiatives related to product strategy. That sounds similar to what we saw several years back from Alibaba (NYSE: BABA) founder Jack Ma, who relinquished his CEO’s title but said he would stay on as chairman to focus on big-picture strategy.  Anyone who knows Alibaba will also know that Ma remains firmly in control of the company, and his abandonment of the CEO title was largely cosmetic.

Shriveling Xunlei

But the differences between Alibaba and Xunlei end there. Whereas Alibaba is one of China’s most valuable companies and a mover and shaker, Xunlei is just the opposite. The company is rapidly shriveling, and is now worth a relatively paltry $200 million. The company’s latest quarterly report showed its revenues are stagnant and its losses growing. And at their current levels, its latest quarterly revenue of $39 million will hardly knock anyone’s socks off.

All that sets the stage for our discussion on M&A. The company’s technology, which is designed to make online video viewing faster, could certainly be attractive to some of the existing players out there, though I honestly don’t know how cutting-edge the technology is. The most obvious buyer would be Xiaomi, which would only need to spend about $45 million to boost its current stake in the company to a majority.

But of course Xiaomi is in cash conservation mode as it tries to right its wobbly ship, and therefore may not want to take on another money losing asset. That would leave one of the other players to swoop in and make a purchase, which could happen. Tencent, iQiyi and Youku, which is owned by Alibaba, all have plenty of cash and might be interested if Xunlei’s technology is compelling enough.

In announcing its latest quarterly results in May, Xunlei also announced the resignation of one of its board members, bringing the board to eight people. This announcement of another major board movement so soon afterwards hints that something could be brewing that would have big implications for the company. I’ve speculated before that Xiaomi might try to buy out Xunlei, and then nothing ever happened. But this time the board movement does seem like a hint that something could be coming, and I would put the chances of a sale at 50-50 or perhaps even slightly higher.

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