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January 13, 2006

A blast from the dot-bomb past

Steve Hamm

Remember chinadotcom? Back at the turn of the millenium, it was one of the hottest startups in Asia and had a market cap of about $8 billion. Well, we all know what happened when reality set in. But, while many of its peers disappeared, chinadotcom had the cash and the will to try to reinvent itself. The Hong Kong-based company has been reborn as CDC Corp. Its two distinct businesses--an Asian Internet business and a global enterprise software business--are doing surprisingly well. But CDC is still operating in the gray zone. It's far from clear that is can be successful in the long term, and what form its business will ultimately take. The stock is trading these days at around $3.50 a share, giving the company a market cap of just $390 million. The chinadotcom journey shows just how hard it is to recover from too much of a good thing.

I met with a couple of the company's executives when they stopped in New York recently. They were in town to try to convince shareholders in software maker Onyx to agree to a merger. CDC's business isn't the only thing that's in flux. So is its leadership. I met Steven Chan, the acting CEO, a New Jersey native who had been the company's chief counsel before he was promoted last year to guide a turnaround. Rick Marquardt, formerly the head of software unit Ross Systems, was appointed president of CDC software in December.

As I said up top, CDC has two very distinct businesses. The Internet unit runs portals in Hong Kong and China. It did about $45 million in revenues last year and is growing at about 20%--largely due to successful mobile services and mobile gaming. The software business is an amalgam. It has software development services in China and has rolled up a handful of medium-sized enterprise software companies, including, Pivotal, in the CRM market, Ross, in ERP, and a majority interest in IMI, a supply-chain specialist. It produced about $200 million in revenues last year--about a 10% growth rate.

CDC Software is attempting to add to its portfolio--a down-market version of what software giant Oracle Corp. is up to. And that's what led it to Onyx, a small, Seattle company that specializes in CRM. CDC made a strange offer for Onyx in December: It would contribute all of its software assets and $50 million in cash in a merger that would give it a majority share of Onyx. The executives and board members at Onyx hated the idea. At first they wouldn't speak to CDC. Then CEO Janice Anderson granted a 30-minute telephoner with Chan and Marquardt on New Years Eve. Six days later, the board rejected the offer. Direct appeals to shareholders haven't been any more successful. "Most of Onyx's shareholders are arbs and hedge funds. All they want is an exit strategy," says Chan. He's working on yet another unique ploy to try to make the deal work: Offering investors two options--a buyout or a piece of the new Onyx/CDC. He plans on coming up with something in the next two weeks. But he doesn't seem that optimistic. "I think most of them just want out."

So it seems CDC may be stymied. With its stock price trading so low, it doesn't have the ability to buy companies for stock. Yet, to compete in the enterprise software market, it needs to gain scale.

My bet: Over the next couple of years, unless it can get its stock price up, CDC will sell its software unit off to a bigger consolidator--maybe SSA Global, the company that bought Baan and Epiphany. That will leave China.com, the Internet unit--essentially back where the company started. This time, though, it has a solid little business. The unit, which is 81% owned by CDC, has produced 22 consecutive quarters of profitability--and it's onto a good thing with mobile gaming.

It may turn out, eventually, that this is a dotcom with legs.

09:12 AM

Asia, Internet

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