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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

AsiaweekTimeAsia NowAsiaweek story

FEBRUARY 25, 2000 VOL. 26 NO. 7

Through the Back Door
Hong Kong's red-hot technology boom is being fueled by reverse takeovers of small and slow-moving companies
By YULANDA CHUNG Hong Kong


"We wanted the fasted way to get listed and we wanted a quality shell," says Kan. Ira Chaplain for Asiaweek
You would think Laurie Kan would at least have someone make his coffee. After all, he is the chairman of Acme Landis, a Hong Kong company with a market capitalization of $281 million. But Kan, 39, does not have a secretary or even an office. Then again, it's only been a few days since he and his partners paid $25.8 million for Acme Landis, a small importer and distributor of bathroom fixtures. They plan to add Internet investing to Acme's very traditional business - thus its soon-to-be new name, i100 Limited. Hong Kong's tech-crazy investors love the concept. From $0.05 per share, Acme Landis's stock price rocketed 2,600% after the Kan group's "front-end subscription."

Note the terminology. The Stock Exchange of Hong Kong (SEHK) does not consider reverse takeovers like this as backdoor listings. "There is no such thing," says a spokeswoman. As long as bourse officials judge the acquirer to be reputable and the target company's business is not totally transformed, deals like Acme's can go ahead. (Kan says toilets will remain part of i100's business.) Never mind that some investors may get burned chasing rumored takeover targets that end up not being acquired, like garments maker High Fashion last year. "Unless you have inside knowledge, you cannot make easy money picking among 600 [third-tier] companies," says analyst David Webb, who is also editor of financial portal webb-site.com. "The share-price movements suggest insider dealings." Adds Peter Churchouse of Morgan Stanley Asia: "So far, the integrity of the regulatory environment has not been undermined. But if you lose that, you're history."

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Infusing assets into a shell company is not new, of course, and doesn't happen only in Hong Kong. But backdoor listings - sorry, SEHK - are particularly hot in the SAR, which saw a spate of such deals during the red-chip craze in 1997. The current fever started last year when young technology tycoon Richard Li took over tiny Tricom Holdings and transformed it into Internet incubator and infrastructure builder Pacific Century CyberWorks. Now boasting a market capitalization of nearly $30 billion, the 10-month-old upstart is making an audacious bid for control of telecommunications blue chip Cable and Wireless HKT. At least eight other reverse takeovers have since gone through. Scores more are rumored to be in the pipeline.

S.J. Wong is in the thick of the action. As a managing director at BNP Prime Peregrine, he helped arrange Richard Li's reverse takeover of Tricom. "After that, we became known as the house to go to for RTOs," says Wong. BNP Peregrine arranged the transformation of property company Paul Y into Net incubator New World Cyberbase, country-club operator Essential Enterprises into E-New Media, real-estate holding firm South Sea Development into Sino-i.com, and textile manufacturer Cheung Wah Development into a yet-to-be-renamed incubator-subsidiary of Japan's Softbank. All were slow-growth small-cap firms with clean balance sheets and were controlled by a major shareholder with at least a third of the company.

Wong left BNP to start e2-Capital, which specializes in later-stage funding for Net start-ups. Perhaps not surprisingly, one of the capital-raising methods he advocates is the backdoor listing. Not every dot-com company can do it, he concedes. "It's better if you are a brand," says Wong. "With Laurie Kan, everyone knew him. Softbank, Hikari Tsushin [which took over battery maker Golden Power with Pacific Century CyberWorks], Richard Li - everyone knows them. It worked the same way for Guangdong Investment and China Resources [during the red-chip boom]. Companies linked to mainland provinces and ministries were the brand names then." Interestingly, the stock price of China Resources has fallen 71% from its peak in 1997. Guangdong Investment, whose mainland parent defaulted on $3.5 billion in debt in 1998, now trades at just a tenth of its 1997 high.

The Shell Game

Hong Kong punters follow the volume turnover of third-tier companies in the search for the next reverse-takeover target. Rumors have been swirling around these firms.

• THE ECONOMY: Average annual growth of 5.2% for the Estrada years - at least 6% for 2001-2004

• Kader Holdings, share price up 134.9% since Jan. 27

• Pam & Frank International Holdings, up 578.6% since Jan. 14

• Symphony Holdings, up 89.7% since Dec. 8

• Whimsy Entertainment, up 389.2% since Jan. 27

• Yanion International Holdings, up 405.5% since Jan. 10

• Yeebo International Holdings, up 165.4% since Jan. 18

Kan is candid about why his group targeted Acme. "We wanted the fastest way to get listed and we wanted a quality shell," he says. "[Acme] is a 50-year-old family business run by three generations which has served the same vendors throughout that time." Under the deal arranged by Jardine Fleming, the founding Chiu family will see its 72.6% holding diluted to 12.1%. Private company i100 Corp., controlled by U.S. investors H&Q AP Fund and J.H. Whitney, will own 62.5% of Acme. H&Q AP will get a further 16.1%, while Kan will have 4.7% through another private company, i100 Holdings, which also has a stake in i100 Corp. All this will leave the public float of Acme Landis at 4.6%. The SEHK requires that the public own 25% of a listed company's shares, so a placement is being planned.

The people who walked through this particular back door at least have a track record. Founded in 1946, J.H. Whitney is one of the oldest venture capital firms in the U.S. For its part, H&Q AP manages $1.6 billion in assets. Kan himself is no tyro in the tech game. He built up the businesses of Microsoft and Compaq in Hong Kong and China, ran China Internet Corp., the forerunner of current Nasdaq favorite Chinadotcom, managed the Hong Kong office of top mainland portal Sina.com, and is part-owner of recently listed Timeless Software, which is buying an indirect stake in Acme Landis through i100 Holdings. Kan, who will take a lead role in Acme, plans to model operations on American premier Net investor CMGI. But he says Acme will be a lot more active in the day-to-day running of the start-ups it will back.

So what's the fuss? Some in Hong Kong fret that investors are not getting adequate information. With initial public offerings, companies are required to file business plans and warn potential shareholders of negative factors that may affect performance. On Hong Kong's fledgling Growth Enterprises Market (GEM), whose rules are more relaxed than the main board's, companies must have a two-year track record to be considered for listing (although this may be waived on a case-to-case basis). None of these apply to backdoor listings. Investors have to rely on announcements by the new shareholders. "Definitely there are [pros and] cons, and there are cons - crooks," says Morgan Stanley analyst Churchouse. "The authorities should protect investors from outright charlatans."

At this point, many Hong Kong punters could not care less. They are far too focused on the next backdoor listing. People avidly follow the stock market's "Top Ten Movers" daily volume reports. "They phone around to find out what they can about them," says Wong. "International funds won't do this, but locals have been known to place up to 10% of their holdings in companies no research institution is following, purely on the basis that it might become a shell." Rumors are swirling around several small companies (see textbox left). One of them is Ocean Information Holdings, whose share price has zoomed more than 200% since Dec. 24. Trading in the stock has been suspended since Jan. 24. Dotcom Pacific, owned 10% by Pacific Century CyberWorks, is reportedly acquiring Ocean Holdings.

There is concern about stunting the development of GEM, Hong Kong's answer to technology-laden Nasdaq. "The only true Internet companies in Hong Kong are backdoor listings," says Antony Yip, CEO of Chinese portal MyRice.com. "If you're an Internet company, you want to be in a space with other Internet companies." But Yat Sui, CEO of portal software company Outblaze, thinks otherwise. "I've always felt that a backdoor listing is a bit like cheating," he says. "And you just don't get the exposure you would get on an initial-public-offering roadshow." Ringo Lam, founder of bilingual online newspaper-clipping company Wisers, is also wary of back doors. "I'm not convinced jacking up the valuation does a company any long-term good," he says. Tell that to Hong Kong's fevered punters.

- With reporting by Maureen Tkacik/Hong Kong

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