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AOL, Legend Consolidation Seen Imminent
The long-expected consolidation of China's crowded and unprofitable Internet sector may be at hand.
US media colossus AOL Time Warner and top China PC maker Legend Holdings are expected to announce a US$200 million Internet joint venture in China that could prove formidable in a market dominated by three cash-burning incumbents still living off the proceeds of their Nasdaq IPOs.
Top portal Sina.com has held talks toward a potential partnership with online conglomerate Chinadotcom Corp on Monday, Sina said its chief executive had quit, and the company fired 15 percent of its staff, or roughly 90 people.
NetEase.com, another money-losing mainland-based portal, is also looking for a buyer.
Meanwhile, Beijing software firm Beida Jade Bird Group, which has been boosting its holding in portal Sohu.com, is believed to be interested in a majority stake.
"The great consolidation is certainly coming, and this AOL/Legend deal just speeds things up, because now you'll have a really substantial competitor in the market," said Merrill Lynch analyst David Cui.
Legend confirmed on Tuesday it had reached a deal with AOL and that concrete plans could be revealed in days. AOL has declined comment.
A linkup between the two could send rivals scrambling to find partners, industry watchers said.
China is adding Internet users at a healthy clip, but its online advertising market is expected to total just US$80 million this year, hardly enough to support numerous ad-supported Web firms.
Industry watchers say that consolidation has been delayed thus far by egos, the expectation that valuations will get even cheaper, and complications stemming from China's policy on the foreign ownership of online content providers.
But with little light at the end of the bleak revenue tunnel, Chinese portal firms appear to be warming to consolidation.
"The further you go, the further you realize this purely online model is not working," said Merrill's Cui.
And with the looming specter of a tie-up such as AOL/Legend, "if you don't do deals, you're going to be left behind," he said.
Sina in play? Wang Zhidong's resignation as CEO and president of Sina removes what observers said may have been an impediment to the company doing a possible deal.
"It indicates, probably, Sina will be more proactive at seeking partners rather than just doing everything itself," Cui said.
Added Stephen McKeever of Lehman Brothers: "That may suggest a renewed sense of urgency toward consolidation."
Neither Sina nor chinadotcom would deny reports that they had held discussions toward a possible linkup.
Wang Yan, Sina's newly-installed president, said: "I cannot talk about the company's secrets, whether they exist or not."
Chinadotcom spokesman Michael McComb said: "Sina being a top portal in the space, we would welcome a mutually beneficial cooperation with them, but in terms of discussions we don't have anything at this point to announce."
Hong Kong-based chinadotcom, which has been slashing costs in a bid to shorten its road out of the red, had US$433 million in cash as of March 31 thanks to a Nasdaq IPO and secondary offering made when dot.com money was far easier to raise.
Jade Bird coveting Sohu? Beijing-based software firm Beida Jade Bird Group, parent of Hong Kong-listed Beida Jade Bird Universal Sci-Tech Co, has been building its stake in Sohu to nearly 19 percent, and is believed by industry sources to be eyeing a controlling stake.
Jade Bird, which bought Intel Corp's 8.6 percent Sohu stake in April and further shares in May, is holding talks "at the highest levels" about further boosting its Sohu stake, said Sohu spokeswoman Caroline Straathoff.
Jade Bird officials did not return repeated phone calls.
NetEase, meanwhile, hired Goldman Sachs months ago to find it a buyer, and has reportedly held talks with several potential acquirers. But NetEase must resolve internal matters including recent revelations that some staff may have misreported contract terms, forcing the company to delay first quarter results.
While the expected AOL/Legend venture would create a power in China's Internet market given their branding and financial muscle, industry watchers say profits were not guaranteed.
"It's hard to see how this thing is going to contribute to Legend's bottom line or revenue for a long time," said Morgan Stanley computer analyst Viktor Ma.
Legend is expected to sell PCs with AOL software installed, possibly replacing links to Legend's www.fm365.com site.
Ownership of the venture must be structured to get around China's ban on foreign Web content providers. The venture will have to include content developed specifically for China.
The venture also would have to contend with a domestic Internet service provider market that is fragmented but also dominated by state giant China Telecom, and must convince Chinese households to sign up for a monthly pay service along the lines of AOL's successful US business model.
Source: chinadaily.com.cn
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