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AOL's Asian cousin
By
Gary LaMoshi
HONG KONG - An Information Age
newcomer emerges as a stock-market darling, richly
rewarding investors. Its chairman's face adorns glossy
business-magazine covers as a guru of a new cyber era
that is changing the world.
At the height of
Internet frenzy, the new economy icon sets it sights on
an old-economy plodder in a related field. The promise
of passing through the looking glass into technology
wonderland seduces the venerable company and its
shareholders. Some of the dot-commers, unsold on
potential synergy, balk at the idea of saddling their
sleek virtual machine with this drag on earnings.
Doubts brushed aside, the record-setting deal
closes, but the companies do not live together happily
ever after. The Internet bubble bursts, and the
new-economy company gets a valuation based on its real
earnings rather than visions of a 24/7-wired universe.
Fast-forward a couple of years, and that
old-economy plodder provides the only honest value in
the merged company. But the dinosaur's worth is
diminished by its association with the fallen icon. The
stock price is in freefall, savagely punishing
investors.
In a nutshell, that's the story of
the record-setting America Online-Time Warner merger.
Except that's not the story I have mind. It's more
precisely the story of Pacific Century CyberWorks'
purchase of Hong Kong Telecom. After hearing it, AOL
shareholders may realize they should praise chairman
Steve Case, not bury him.
The PCCW story begins
with its chairman, Richard Li, the flamboyant son of
Hong Kong's leading tycoon Li Ka-shing. More responsible
son Victor is due to take the helm of the family's
Hutchison Whampoa property and communications empire.
Poor Richard was thrown out into the cruel world,
kicking around as an investment banker and entrepreneur
on three continents until he launched PCCW.
Tricom transformed
In early 1999,
young Li's Hong Kong-listed Tricom acquired the rights
to develop a fine piece of property on Hong Kong island.
Li said he would create CyberPort, a regional center for
the Internet industry (though 75 percent of the
development would be more conventional and profitable
residential). Land is more valuable than gold in Hong
Kong, but Tricom, which would soon rename itself Pacific
Century CyberWorks, obtained the land from the Hong Kong
government without the usual public tender process at a
sweetheart price.
You may believe the elder Li's
close relationship with Hong Kong Chief Executive Tung
Chee-hwa and his minders in Beijing had nothing to do
with Tricom's stroke of good fortune. That's easy to
believe, compared with Richard Li's subsequent
cyberbabble that sent PCCW shares to a high of HK$26.35
(US$3.39) in early 2000.
Li became the poster
boy and leading quote for Asia's catch-up play in the
Internet age. No doubt he envied the fame of Silicon
Valley's young pioneers, some of whom attended Stanford
University with him. (Last year, Li's claim that he
graduated from Stanford, echoed in PCCW documents
and every fawning profile, was proved false.)
Heralding the age of "convergence" between the
computer and the television, Li launched Network of the
World (NOW), which aimed its web-delivered content as a
dagger at the heart of satellite TV broadcasters, such
as the rival Murdoch clan's StarTV. Ironically, Rupert
Murdoch's purchase of the red-ink broadcaster from
founder Li provided seed money for the property
investments that became PCCW.
NOW made a limited
appearance on a few cable systems, notable only for
proving only that PCCW could produce something other
than hot air. The company's primary activity was trading
its hot stock for stock in other Internet visionaries,
most of which proved to be worthless, and issuing
breathless news releases about molding the digital
future in Asia and beyond. Li's rhetoric, the global
dot-com mania, and willing investment banking
accomplices fobbed more PCCW shares on to a gullible
public to finance the madness.
Isn't it
romantic?
On Valentine's Day 2000, Li
proposed to HKT, Hong Kong's former telephone monopoly.
Owner Cable & Wireless (of the former colonial
ruler) was looking to unload its imperial relic. Though
it still threw off lots of cash, HKT's growth prospects
were minimal as new operators attacked its formerly
exclusive markets with entrepreneurial zeal largely
absent in HKT's bureaucratic culture.
Singapore
Telecom had come sniffing around HKT. Hong Kong's great
and good were outraged that their city-state rival might
seize their communications jewel and, with it, regional
telecom supremacy. Enter PCCW, amid suspicions that
local and Beijing mandarins had encouraged this local
favorite to bid. C&W accepted PCCW's HK$250 billion
proposal over a competing offer from SingTel, which
added Murdoch's News Corp- as an eleventh-hour partner.
HKT management had made a timely and successful
move into Internet services, along with less successful
forays into pay television (including the vaunted
movies-on-demand arena), giving PCCW a semblance of
synergy in the acquisition. AOL's merger with Time
Warner was a much better fit, with each partner
contributing distinct platforms, content and paying
customers. PCCW had none of the above.
HKT may
have been a company nearing its expiration date, but it
was nevertheless selling for HK$17.35 before PCCW
swooped in. It offered 1.1 PCCW shares for each HKT
share, or two alternative combinations of PCCW shares
and cash. The bursting Internet bubble in the United
States sent PCCW stock plummeting before the deal closed
in August 2000, despite heady valuations from Hong Kong
bankers, most of whom had some piece of the deal.
Nearly all shareholders opted for the
combination offers, worth HK$18.26 or HK$18.19 at the
time the deal closed, when PCCW stock sold for HK$15.40.
C&W, which hoped to get US$11.3 billion and about 10
percent of PCCW in the deal, instead wound up with
barely US$6 billion and more than 21 percent of PCCW's
shares, which it has sold as quickly as permitted under
terms of the deal, further pummeling the stock.
Green cheese
As part of PCCW, HKT
has gone from slowly turning sour like old milk in the
back of the fridge to Limburger in the afternoon sun,
largely because of the US$12 billion PCCW needed to
borrow for the deal. PCCW's Internet investments have
fared similarly and its convergence ambitions have been
quashed, leaving HKT's dull, shrinking telephone
operation as all the value that's left in the company.
Shares in the combined company fell through the HK$1
barrier on Monday.
While C&W and HKT former
shareholders may be rightfully incensed at what happened
to their investment, they had a chance to sell out
before the deal closed. PCCW shareholders, on the other
hand, should salute Richard Li for attaching something
of value to their inflated shares; otherwise they'd be
holding nothing but cyberspace today.
Back in
the US, many AOL-Time Warner investors, including top
shareholder and board member Ted Turner, are calling for
the head of chairman Case; at merger time Turner had
compared his excitement to "the first time I made love".
As with Hong Kong deal, it all depends which side of the
merger you were on.
AOL shareholders should
praise Case for using his bubble-priced paper to
diversify the company while Yahoo! and other
cyberdarlings missed the boat. Time Warner shareholders
have no one to blame but themselves. Like HKT investors,
they could have sold. Instead, along with Time Warner
management, they drank the Kool-aid.
(©2002 Asia
Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication policies.)
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