Kingsoft's Tarnished Crown
Kingsoft calls itself "a leading internet-based software developer, distributor and service provider."
The Hong Kong-traded company acts more like a venture capitalist.
The maker of online games and office software announced Sunday night plans to write off $125 million from the value of two of its U.S.-listed Chinese investments: Xunlei and 21Vianet.
Back in April 2014, the company paid $90 million for a 10 percent stake in Xunlei, 1 a video and file-sharing provider. That investment looked like a very VC move, given Xunlei's Nasdaq IPO two months later. Yet its opening-day spike was followed by a long, slow decline, and by the end of the 180-day lockup the stock had fallen 45 percent from its IPO price.
Then came 21Vianet. In November 2014, one month after delivering a profit warning, Kingsoft paid $172 million for 11.6 percent of the Nasdaq-traded provider of data-center and network services. China's Xiaomi -- whose chairman, Lei Jun, also is chairman of Kingsoft -- and Singapore's Temasek also bought in.
At $18 per depository receipt, the deal was no steal for the new investors, given that the paper was newly issued, and existing ADRs averaged closer to $20 each over the prior 30 days. The stock is now trading at half that price, prompting the Sunday surprise.
In both cases, Kingsoft said the investments had strategic benefits. Justifying the Xunlei deal, it made the circular argument that "cooperation may expect to bring about more business cooperation opportunities." In the second investment, the Kingsoft money would fund expansion of 21Vianet's data centers, and then Kingsoft would be locked in to leasing some of that new capacity for three years.
Beyond those two investments, Kingsoft's universe includes Xiaomi, the $45 billion smartphone startup that might not actually be worth $45 billion; Cheetah Mobile, the U.S.-listed app developer that's dropped 62 percent in the past year; Seasun Entertainment, an unlisted games developer; and KSYun, a Chinese cloud-computing provider.
Strategic opportunities can be a solid reason to buy into a company, allowing both parties to share technologies and systems, form ventures and co-develop products. "Strategic opportunities" can also be an excuse for doing deals that might not otherwise make sense. Given that Kingsoft could have worked with both Xunlei and 21Vianet without being a shareholder, its reasoning seems less than solid.
The transactions look especially expensive given that Kingsoft went to the capital markets to fund them, then wrote off 48 percent of their value. With the write-off equal to double last year's net income, and no mention yet of the fate of the Xiaomi or Cheetah Mobile holdings, Kingsoft's spending spree doesn't look quite so strategic after all.
The purchase was of preferred shares that could be converted to ordinary shares at any time on a 1-1 basis.
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