International -- Asian Business: The Internet
In Asia, the Dot-Coms Are Clicking on "Exit" (int'l edition)
In Asia, there isn't enough capital to keep startups going, and a brutal shakeout looms
In the 17 months since he founded his Chinese-language Internet sports portal, entrepreneur Fritz Demopoulos has come full circle. The Californian's first plan for his Beijing startup outfit, Sharkwave Information Technologies Co., was to build it up, then sell it to a big media company interested in the Chinese Net market. But by early this year, Demopoulos had won investments from such high-prestige outfits as Softbank Corp. and International Data Group. So he set his sights on an initial public offering that would value Sharkwave at as much as $50 million.
Then the April market crash hit, and Demopoulos, 32, fell back to his original position. With Chinese Net stocks floundering and venture capitalists fleeing, he signed a preliminary agreement in August to sell Sharkwave to Hong Kong portal Tom.com for $20 million. Demopoulos considers himself lucky. "In this market," he says, "if you're able to exit, it's pretty amazing."CARNAGE. In the space of a scant six months, Asia's dot-coms have gone from IPO euphoria to market crash to brutal endgame. With a host of companies such as Sharkwave at risk of disappearing, all those would-be Netzillionaires in Bombay, Hong Kong, Shanghai, and elsewhere are scrambling to survive. The result: Twelve months from now, the Net scene in Asia will be dramatically different. A handful of deep-pocketed local players and the best U.S. companies will dominate the industry. And all those cocky upstarts who made the scene so vibrant? Most of them will be working for someone else.
It's probably a healthy development, despite the carnage. There just isn't enough capital to keep all the startups going. The IPO window has closed for most Asian Net companies, forcing upstarts to survive on their own revenue--which is often minimal--sell out, or go bankrupt. But this spells opportunity for well-capitalized, publicly listed companies such as Tom.com, controlled by Hong Kong billionaire Li Ka-shing, and Chinadotcom Corp., which is owned by America Online Inc. and Xinhua, the official Chinese news agency. The latest prey: Chinese e-mail provider 163.net, which, on Sept. 6, Tom.com announced it was buying for $48 million.
Other attractive buyout candidates include portals such as Sohu.com and Netease.com, which are strong in China. Both have seen their stock plunge, with Sohu off 30% since July and Netease down 45%. No surprise then that in August, Sohu announced a cooperation agreement with Chinadotcom, in what some see as the first move toward a merger. For now, Sohu CEO Charles Zhang says that Sohu "will probably stay as a stand-alone company," but he adds that "we will work with Chinadotcom in many ways."
Many second-tier portals are simply doomed: unlikely to find buyers unless they have substantial revenue potential. Likely victims include Singapore's MediaRing.com and Korea's Serome Technology, both free Internet phone services that, after flashy IPOs, have seen their stocks sink by more than 70%. Another sector that has lost its allure is Internet incubation. Sino Land, a property developer controlled by Singapore tycoon Robert Ng, last month shut down its fledgling incubator, Base88.
Companies hoping to be eaten by larger rivals must meet a high standard. "We will look at some Web sites, but they have to be sites with high page views and few staff," says Michael Robinson, CEO of Hong Kong-listed Renren Media, which itself had to lay off 102 of its 270 employees last month. So companies such as Singapore's Catcha.com, which in May abruptly shelved its IPO, may be hard pressed to find buyers. Catcha has to contend in its Singapore backyard with powers such as Yahoo! Inc. as well as publicly listed SPH AsiaOne, controlled by the government's Singapore Press Holdings. Catcha insists that it can survive. "We have the funds," says spokeswoman Peggy Lee.
In addition to Tom.com and Chinadotcom, other regional players out to make acquisitions include Hong Kong's Pacific Century CyberWorks, controlled by Li's son Richard. In Korea, dominant early movers such as Dacom, controlled by LG Group, have the edge."PICKING UP." In India, Rediff.com, a popular portal, went public last spring and raised $55 million. Because of Rediff's head start, "new players will find it difficult to make a dent," says Viju George, an Internet analyst at Kotak Securities in Bombay. Those that try could end up as Rediff subsidiaries.
Even those companies that are leading the Internet pack are taking their licks. Peter Yip, CEO of Chinadotcom, raised some $450 million from the equity markets and vows to spend $200 million on acquisitions. "There are a lot of companies you can buy," he says. "We are picking up the pace." But Yip has also seen his stock price plunge 75% this year, with the price of subsidiary Hongkong.com down a staggering 90%. Rediff has also been caught in the downdraft. That's because, while it has a big edge over other portals, says George, 65% of its ad sales come from other dot-coms, so "the revenue base is shaky."
Among the companies poised to take advantage of all this bloodletting are multinationals that can rely on income from the U.S. This group includes Yahoo, AOL, and Microsoft. Yahoo has ambitions to extend its strong position in Japan to the rest of Asia. It is already more popular among Hong Kong Net surfers than high-profile local competitors such as Hongkong.com and Renren.com. Yahoo India made its debut in July and since then it has been busy forming partnerships with local sites such as IndiaFM.com.PROVEN. The shakeout is forcing some companies to stay clear of Asia's riskiest markets. Asiacontent, which creates local-language sites for MTV and CNet, raised $70 million in an April Nasdaq listing. But the company's stock price is down 75% since then, and Chris Justice, Asiacontent CEO, says the "burn" rate in the second quarter was $3 million a month. To reduce costs, Asiacontent will be focusing more on proven markets such as Japan and Korea, rather than growth areas like China and India. Says Justice: "Sure, the landscape will change over time, but the revenue side of the picture will take longer to catch up."
Meanwhile, many dot-com execs who spent a lot of energy building up brand names will see their effort wasted. Once Tom.com takes over Sharkwave, Demopoulos says, the name will disappear, replaced by Tomsports. "We had a great brand, great traffic, and a great team," he says with a sigh. "But the cost and the revenues didn't make much sense." Many entrepreneurs across Asia are hoping that by being part of a bigger team, they will finally start making sense of a troubled market.By Bruce Einhorn in Hong Kong, with Manjeet Kripalani in BombayReturn to top