SINA's (NASDAQ:SINA) stock surged 10% on July 6 after the Chinese tech company received a go-private offer from New Wave MMXV, a British Virgin Islands-based company controlled by SINA's own CEO Charles Chao. New Wave already held a 55.5% voting stake in SINA after a share subscription agreement in late 2017. That deal issued 7,150 new Class A shares of SINA, which each had a whopping 10,000 votes per share, to New Wave.
New Wave wants to acquire the remaining shares of SINA for $41 per share in a $2.7 billion deal. However, many investors likely consider this a lowball offer, since it values SINA at just over one times next year's revenue. SINA's stock was also trading at about $120 per share just over two years ago.
Some investors might believe New Wave's offer is justified, since SINA's stock has barely budged over the past 12 months, even after the company repurchased 3.2 million shares as part of a new buyback plan last quarter. The bulls likely shunned SINA because it's still struggling with slowing growth, tough competition in the advertising market, and tighter regulations for U.S.-listed Chinese stocks.
SINA's board has formed a special committee to evaluate the non-binding offer. For now, it's unclear if SINA will be taken private, or what will happen to Weibo (NASDAQ:WB) (which SINA retains a majority voting stake in) after the deal. Nonetheless, the offer raises serious concerns about other U.S.-listed Chinese stocks.
SINA opened the floodgates for other Chinese stocks
When SINA went public in 2000, it used a VIE (variable interest entity) structure to bypass Chinese regulations, which barred foreign investments in "sensitive" sectors like internet and education companies. SINA's VIE was a holding company in the Cayman Islands, owned and controlled by Chinese nationals, which held private shares of SINA. So when SINA went public in the U.S., it actually sold shares of this VIE -- not the underlying company -- to American investors.
SINA's introduction of the VIE structure opened the floodgates for other Chinese tech companies, including Baidu (NASDAQ:BIDU), Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), and NetEase (NASDAQ:NTES), to establish similar holding companies in the Cayman Islands and launch American IPOs.
If SINA retreats from the U.S. market, could these other tech giants be mulling similar exit strategies as a new Senate bill pressures Chinese companies to either open their books or delist their stocks?
Going private or going back home
Many Chinese companies -- including internet security firm Qihoo 360, medical device maker Mindray Medical, and Wuxi Pharmatech -- previously went public in the U.S., delisted their U.S. stocks, then went public again on Chinese exchanges at several times their U.S. valuation.
Most of those deals were executed via go-private offers from separate groups or companies controlled by the original company's founder or CEO. These bidders generally held a majority voting stake in the targeted company, which prevented any major investors from blocking the deal. Therefore, many American investors in those companies were burned by lowball offers, then left out in the cold when they went public again in China.
The trade war and the threats against U.S.-listed Chinese companies recently caused more Chinese companies -- including online classifieds giant 58.com and Bitauto -- to go private. Other companies, including online cosmetics retailer Jumei International and video game publisher Changyou, merged with their parent companies and delisted their U.S. stocks.
Alibaba, JD, and gaming giant NetEase are retaining their U.S. listings for now, but all three tech giants recently launched new IPOs in Hong Kong -- presumably as escape hatches for a worst-case scenario. Baidu has also hinted at launching a similar secondary listing.
Is SINA the tip of the iceberg?
SINA could be taken private soon, and there's likely nothing U.S. investors can do to halt the deal. Investors in other Chinese companies, especially smaller ones firmly controlled by a founder or CEO, should be wary of similar lowball offers that can't be blocked.