Back in September, US hedge fund Aristeia Capital challenged SINA (SINA), one of China's oldest internet companies, in a rare activist move against a Chinese company. Aristeia, which owns a 4.2% stake in SINA, believes that SINA's current board has become too "entrenched", and that "critical governance failures" caused the stock to be undervalued.
Aristeia wants SINA to expand its five-member board to directors to seven seats with two of its own nominees. It also wants SINA to maximize the value of its stake in Weibo (WB -1.98%) -- the social media platform it spun off via an IPO in 2014 -- through a sale or a reverse merger. It then wants SINA to return that cash to shareholders through bigger buybacks.
Image source: Getty Images.
SINA shot down those ideas, stating that Aristeia's nominees added no new experience to the board, and that it was only interested in "implementing a short-term and self-serving agenda." SINA shareholders are currently voting on Aristeia's proposed changes to the board; the final vote will be tallied after its annual meeting on Nov. 3.
Ahead of that decision, SINA sent a letter to its shareholders with a rebuttal against Aristeia and its proposals. Let's take a look at five of SINA's key arguments.
1. SINA already buys back shares
In response to Aristeia's suggestion for SINA to sell its remaining stake in Weibo to generate cash for buybacks, SINA noted that it already repurchased $311 million in shares since March 2016 under its current $500 million buyback plan.
It also points out that it returned about $1.7 billion in capital to stockholders since 2014 -- "the highest amount for China-based internet and technology companies listed in the US."
2. SINA's CEO is personally invested in the company's growth
SINA points out that CEO Charles Chao owns about 12% of SINA's shares, which he intially purchased back in June 2015. Shares of SINA rallied about 115% since that purchase.
However, Aristeia claims that most of those gains came from its stake in Weibo, which generates the lion's share of its revenue and offsets the slower growth of its aging portal business. Aristeia would also likely point out that Weibo rallied 435% during that same period.
3. SINA has used share distributions to placate shareholders
To address that disparity, SINA distributed 14.2 million of its own Weibo shares to SINA investors via two 1-for-10 distributions, one in April 2014 and another in October 2016.
Weibo's mobile app. Image source: Google Play.
This means that an investor who originally held 100 shares of SINA would now own an extra 20 shares of Weibo. As a result, SINA's ownership in Weibo dipped from 56% to 46%, but it still retains a 72% voting stake. SINA argues that Aristeia's plan doesn't take these distributions, along with its prior buybacks, into account at all.
4. Aristeia shouldn't control two board seats with a 4% stake
SINA claims that it is "vitally important" for its board to understand the significance of regulatory issues in China. SINA believes that Aristeia's two board choices -- tech start-up investor Brett Krause and law school professor Thomas Manning -- aren't experienced enough with these issues.
SINA also states that giving Aristeia nearly 30% control of the board is disproportionate to its 4% stake in the company.
5. Attacking Aristeia's track record
Lastly, SINA claims that Aristeia has a record of "poor governance practices and federal securities law violations." SINA points out that Krause is also an investor in Inke, which makes a live streaming app that competes against Weibo. SINA calls this a "conflict of interest" for a potential board member. SINA also accused Aristeia of refusing to make either of its nominees available for interviews.
SINA also claims that Aristeia "repeatedly violated Federal Securities Laws" in the past. Specifically, SINA highlights four violations in the first half of 2008, in which the fund bought shares of a follow-on offering from a broker after selling the original stock during the restricted period, which resulted in a $1.76 million fine.
The bottom line
As a SINA shareholder, I don't think Aristeia can win this battle with a 4% stake. The fund seems to be applying the logic of Yahoo's former stake in Alibaba (BABA 0.28%) to Sina's stake in Weibo, but that's not an analogous comparison.
Alibaba and Yahoo operated in different countries and ecosystems, but SINA and Weibo's news and social media ecosystems are joined at the hip. It also seems that Aristeia is glossing over key facts, like SINA's previous buybacks and the Weibo share distributions, to promote the "simple" notion that an "undervalued" SINA should sell its remaining stake in Weibo or sell itself.
Even if Aristeia's nominees get enough votes, it's also highly unlikely that Chinese regulators will let a US hedge fund gain control over one of its top internet companies. Therefore, I believe that this activist move -- while bold -- is doomed to fizzle out.
