HONG KONG (Reuters Breakingviews) - China’s Sina is only likely to produce a qualified victory for activists. U.S. hedge fund manager Aristeia Capital wants the $8 billion web group to consider a sale or a merger with subsidiary Weibo. The former would never get past Chief Executive and Chairman Charles Chao, and the latter is a bad idea. But Chao could compromise by expanding the board, stepping up buybacks and handing out more Weibo shares.
This is a milestone. Shareholder conflict is not unknown at mainland tech firms listed abroad: last year, Baidu’s chief executive was forced to drop the lowball buyout of a video unit. But thus far, the wave of activism washing over Western public companies has not troubled Chinese tech much. Sina shows the complexity of waging such campaigns, even for agitators who have a strong case.
On the face of it, Sina makes an attractive target. The company is poorly governed, undervalued, and unlike most tech peers, its boss holds just a 12 percent stake and an equivalent amount of voting rights.
Aristeia is campaigning to get two nominees on Sina’s board. The activist, which says it holds 4.2 percent, argues bad corporate governance has led to a persistent valuation discount. Adding outside directors could pressure boss Chao to consider Aristeia’s ideas.
Sina’s core business of PC-era web portals is in decline. But it holds a 46 percent stake in the Twitter-like Weibo. That stake has a market value of nearly $10 billion and could command a premium if sold, thanks to Sina’s majority voting control of the microblog operator.
Add in Sina’s other investments and net cash, and a full sale of Sina could theoretically deliver a huge uplift in value to shareholders. It trades roughly a third below net asset value, JPMorgan analysts estimate.
But this is an unlikely scenario. Even though Sina is listed abroad, Beijing would not permit such a sensitive business to be sold to foreigners. Sina could attract Chinese buyers, potentially Qihoo 360, the security software maker, or Jack Ma’s $436 billion Alibaba. Ma’s e-commerce giant already has a sizable stake in Weibo and covets a social network to rival Tencent’s WeChat. But the five-man board, made up of Chao and four allies, can issue special shares with extra voting rights at any time, bolstering his control. So Chao can dig his heels in here.
Nor would a reverse merger with the $21 billion Weibo achieve much. The subsidiary was spun out of Sina three years ago and its market value has since soared fivefold, to overtake its parent. But this would be a step backwards: Weibo has few obvious synergies with Sina’s web portals, and a reunited group would probably trade at an even bigger discount.
That leaves stepping up buybacks and handing out more Weibo shares. This would effectively amount to continuing Sina’s current policies, which would hardly be a resounding victory for Aristeia. Still, at least Sina can afford both: the company has $1.9 billion of net cash and short-term investments. Its 72 percent voting share in Weibo means it can further reduce its stake while keeping a majority vote.
The catch is Sina shareholders will have to be patient. The board argues that handing out a huge chunk of Weibo shares in one go could bring a giant tax bill for shareholders. They have a point: it risks being treated as a foreign investment holding company, for U.S. tax purposes, which would mean shareholders are subject to higher rates.
In the meantime, Chao could gain some goodwill with other shareholders by expanding the board himself. He holds a permanent seat; the four other directors each have a tenure of more than a decade, and none looks very independent. If Aristeia drums up enough support for its candidates, Chao may as well get used to more outside views in his boardroom.
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