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The Dealmakers (Int'l Edition)


International -- Asian Cover Story

The Dealmakers (int'l edition)

Long the most powerful business family in Hong Kong, the Li dynasty is staking a bold claim on Asia's New Economy

Internet tycoon Richard Li spared no expense ringing in the millennium. The 33-year-old founder of Pacific Century CyberWorks Ltd. flew American pop diva Whitney Houston to Hong Kong to sing at his all-night New Year's Eve party for thousands of revelers. Since then, the young mogul has been making a show of his wealth and power with deal after deal. He is now preparing his most audacious move yet: an attempt to trump Singapore Telecommunications Ltd. in a bid for Cable & Wireless HKT, the local phone giant with a $37 billion market capitalization.

The young Li's financial fireworks aren't the only ones in Hong Kong these days. Richard's father, billionaire Li Ka-shing, is pulling off some pyrotechnics, too. The elder Li's companies, Hutchison Whampoa and Cheung Kong property, control the world's largest port operations, prime real estate in Hong Kong, a leading Israeli cellular operator, and lucrative retail chains. Now, Li, at age 71, is becoming a Net mogul, too. He's just parlayed his 1994 investment in Europe's telecom companies into a $21 billion windfall, with British cellular operator Vodafone AirTouch PLC winning its bid for Germany's Mannesmann. Li Ka-shing is also forging Net alliances with the likes of Priceline.com, launching a new Chinese-language Internet portal, and running a fiber-optic joint venture with Global Crossing. He has billions more to invest.HIGH-SPEED AMBITIONS. Long the most powerful business family in Hong Kong, the Lis are moving to stake a solid claim to the New Economy of Asia. A successful bid by Richard for HKT could further both their goals. HKT's broadband network--the biggest in Asia--would provide steady revenue for Cyberworks and boost its plan to launch a high-speed Internet service regionwide. Li Ka-shing also operates Hong Kong's biggest cellular operator and a fixed-line network. So the father might be well-positioned if son Richard breaks up HKT, keeps the Internet business, and sells off the rest to Hutchison. Whether they work separately or together, the pair are joining the likes of America Online Inc.'s Stephen M. Case and Softbank Corp.'s Masayoshi Son as elite players in a global industry that combines wireless telephones with high-speed Internet connections.

The astounding thing is that Richard's CyberWorks lacks both operating revenues and profits: Its rocketing stock value is based on its stakes in a variety of Internet plays, and investors' belief in the Li magic. Thus CyberWorks' market cap--almost $30 billion--is bigger than that of Amazon.com Inc. A successful deal could mean that New Economy companies will soon tear through the old-style corporations of Asia, paying for their conquests with stock. "This is just the beginning," says Pete Hitchens, regional Internet analyst for Salomon Smith Barney, who sees many more Asian deals as Net players take on established blue-chips.

There's a political dynamic, too. If the Lis manage to oust the Singaporeans from contention, it will highlight the advantage of being a hometown player in a city long ruled by the guiding hand of guanxi, or connections. Li Ka-shing has powerful ties with Beijing, and is close to Hong Kong Chief Executive C.H. Tung. Rumors are circulating that Richard traveled to Beijing Feb. 13 to consult with authorities. "Such ties have helped ensure the family's preeminence in the Hong Kong economy," says Albert Cheng, Hong Kong's most outspoken radio host. Neither Richard nor his father would be interviewed for this story.

Still, the new Internet world is a much bigger playing field than the familiar confines of Hong Kong. CyberWorks' stock, which Richard would use to secure a HKT purchase, is flying high largely because foreign investors have so few choices to play the Asian Net. Richard wants to move quickly to trade paper for assets, before other players get into the game. "When you have a bubble stock on your hands, it's rational to buy something," says David Webb, a leading independent analyst who runs his webb-site.com. "I haven't seen such an audacious bid in years."

Cable & Wireless PLC, whose 54% of HKT is for sale, may end up concluding the same thing. Although Richard has raised $1 billion for the purchase, he'll need far more cash to convince the British to sell, since they're unlikely to accept only inflated stock.

But if HKT eludes him, you can expect other big deals from Richard. The No. 2 son clearly wants to build something. When he was just 24, Richard launched Star TV, an Asiawide regional broadcaster, with help from dad. In 1993, the Lis sold Star to Rupert Murdoch. Richard was praised for his audacity--but he really wanted to hold onto Star and develop it. His father insisted on flipping the asset. Richard's subsequent ventures were not especially brilliant--until the Internet frenzy hit Asia. With incredible speed the slight, intense--some say arrogant--Richard has moved to corner his piece of cyber real estate, and grab a second chance at building an empire.INTERNET CATALYST. Around for less than a year, CyberWorks has been a market phenomenon. The stock took off in December as Richard's dealmaking caught investors' attention (chart). Even Richard's critics credit him with the rapid rise of the Internet in Hong Kong. His controversial deal with the government to build a $1.6 billion high-tech center without competitive bidding triggered a storm of protest. But the project, dubbed Cyber-Port, also sparked a torrent of dot-com startups in Hong Kong at a time when the city was struggling through its worst recession ever. The billions in venture capital that have flooded in since then have given Hong Kong a chance to reinvent its economy. Richard has given himself a makeover, too. Unlike his father, whose dark suits and low-key demeanor mark him as a traditional Chinese businessman, the younger Li has adopted some of the informality of Silicon Valley. He now carries a backpack and wears sweaters to public appearances.

The deregulation of Asia's telecom sector gave Richard room to pounce on HKT. With the Hong Kong government pushing a dramatic liberalization, HKT is becoming far less important to Cable & Wireless. The Brits announced plans last month to sell their stake to SingTel, the state-owned telecom run by Lee Hsien Yang, the second son of former Prime Minister Lee Kuan Yew. SingTel also faces increased competition from deregulation at home. The markets saw the deal as a desperate embrace by two dinosaurs. The share prices for both companies dropped, creating an opening for Richard.

Should Hong Kong's Lis prevail over Singapore's Lees, the victory will be one forged from Hong Kong's world of connections and cartels. Li Ka-shing is a key player in the cozy group of property companies that grew fat during Hong Kong's long asset boom that ended with the 1997 crash. With the recovery, the property cartel is staging a powerful comeback. The elder Li controls utility Hongkong Electric Holdings Ltd., a major beneficiary of government-mandated pricing that critics say penalizes consumers. Hutchison's ParknShop grocery stores and its Watson's drugstores nestle comfortably inside buildings owned by Li's other properties. The chains have long shared a comfortable oligopoly with crosstown rivals owned by the Jardine Group. Li also owns Fortress, Hong Kong's only retail electronics chain.

The local press has dubbed Li "Superman." He has shown an uncanny sense of timing, ranging from a well-placed move to raise cash just before the October 1987 market crash to the recent Mannesmann coup. Success comes with a price: Li surrounds himself with bodyguards following the 1996 kidnapping in Hong Kong of his eldest son, Victor, who is also a deputy chairman of Hutchison.SHREWD INVESTMENT. But Li has never made so much money so fast as in the last six months. In 1994, Li made a shrewd investment in Orange, a promising cellular-phone operator in Britain. Last fall, he suddenly decided to sell his stake in Orange to Mannesmann for a $13.6 billion profit. He and his trusted lieutenant, Canning Fok, conducted a lightning negotiating session with Mannesmann chief Klaus Esser, then left the details to their underlings. "It was done over the next two days," marvels Esser.

Part of Li's payment was a large chunk of stock in the German company. Thus, when Vodafone went after Mannesmann, Li was the most important player in the fight. In the final days of the Vodafone-Mannesmann battle, Li again sent Fok to Europe as his emissary. Fok, a classical music aficionado who once negotiated the purchase of a U.S. telecom company as he tested pianos in a London music store, was a key negotiator with Vodafone chief Chris Gent as details of which managers and directors would move from Mannesmann to Vodafone evolved. Fok himself is likely to join the Vodafone board, now that Hutchison holds 5% of the new company's stock.

So far, Li hasn't shown a coherent international telecom-Internet strategy. But plenty of global players see him as a ticket to entering China's evolving high-tech market. Li Ka-shing has a joint venture with Compaq Computer Corp. to set up an e-government site in Hong Kong, which would allow residents to register for services like birth certificates online. In January he announced a link with Priceline.com for an Asian version of the popular U.S. site.UNCONVENTIONAL STRATEGY. Richard is gathering allies from afar, too. In January, Richard formed a joint venture with U.S. Internet giant CMGI INC. to bring the AltaVista.com portal and other sites to Asia. The Lis are active in Japan as well. On Feb. 11, Richard executed a $1 billion stock swap with Japanese cyber powerhouse Hikari Tsushin Inc. to cement alliances between the budding empires. All told, Richard is sitting on $1.3 billion in paper profits from CyberWorks' investments in some 30 Internet companies, ranging from Chinese-language portal SINA.com to U.S. broadband service provider SoftNet Systems.

Besides putting millions into startups, Richard is also building bricks-and-mortar projects, ranging from Cyber-Port to production studios to create programming for his TV-based Asiawide broadband service, Network of the World (NOW). The strategy is unconventional, concedes Richard's lieutenant and group Managing Director Alex Arena. "What we are doing is building a complete jigsaw," he says. "If we assemble as many opportunities as possible, we have the most robust business case going forward." To fund his ambitions, Richard has raised $2.4 billion in the stock market, including the $1 billion raised in mid-February.

The idea behind NOW is to deliver interactive Net access by satellite and cable to television sets in hundreds of millions of Asian households--and then roll it out to the rest of the world. When it's launched later this year, NOW will have English-language programs that look like regular TV programs but allow interactivity like Web sites. To do that, Richard's programming studios in Hong Kong and London have been luring creative talent from California.

But broadband has yet to be a success in Asia, and interactive TV hasn't taken off anywhere in the world. Only a handful of the cable operators in the region are capable of handling two-way traffic. Until they upgrade their systems, the service will be cumbersome. That's one reason Li wants HKT, which has an advanced broadband network capable of handling NOW from day one. HKT's core long-distance business, meanwhile, is facing dwindling profits as new rivals spring up. "It's an elephant," says Dylan Tinker, a telecom analyst at Deutsche Bank Securities in Hong Kong. "[HKT's] structure doesn't allow it to quickly respond to the market."

It will be interesting to see if the elder Li buys into Richard's vision of the Net future. His companies have repeatedly invested in Richard's, and critics have called some of the deals bailouts. Hutchison bought a 45% stake in a Tokyo property project of Richard's in 1997, even though Richard had been criticized for overpaying for the site. Hutchison not only met Richard's costs, it added a 3% finder's fee. Yet despite the fact that Richard sits as a deputy chairman of Hutchison, he bristles at suggestions that his success isn't his own. He keeps his sedate wood-paneled offices in a building not owned by his father.

Much as many in Hong Kong would welcome a white knight to keep the Singaporeans at bay, there's worry that the Li family is playing too big a role in the local economy. "Shipping, retail, and telecom are all controlled by the Li family," says Sin Chung Kai, a legislator representing the information technology industry. "There should be an antitrust law." The Chief Executive opposes any such thing.

Indeed, those who would like to see SingTel take over HKT accuse the local business community of circling the wagons against an interloper. Clearly, the business elite of Hong Kong and the mandarins in Beijing aren't keen on the idea of a government-controlled company from archrival Singapore taking over HKT. As for a Beijing role in keeping Singaporeans at bay, the Chinese government has been silent. But its China Telecom unit owns 10% of HKT, and everyone from investment bankers to political analysts believes that Beijing favors a Li bid. It's a classic deal from the Li dynasty: A gambit combining big business visions and deft maneuvering in the corridors of power. As the New Economy sweeps through Asia, to the swiftest of the families will go the race.By Mark L. Clifford and Bruce Einhorn in Hong Kong, with Frederik Balfour, in Hong Kong, Jack Ewing in Frankfurt, Michael Shari in Singapore and Bureau ReportsReturn to top


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