Focus Media's proposed delisting from the Nasdaq stock market in the United States is set to be a template for other Chinese companies that are growingly uncomfortable with the US market environment.
About seven years after the Shanghai-based display-advertising company went public in the early wave of Chinese firms' venturing onto Western capital markets, Focus Media this week surprised shareholders with a US$3.5 billion plan to take the company private, backed by management and several private-equity funds.
If successful, the deal would make it the largest Chinese company to delist itself on a US stock exchange, signalling an important change in sentiment towards the American market among Chinese entrepreneurs.
The delisting plan started as a reaction to an attack on Focus Media by short-seller Muddy Waters, which accused the company of fraudulently overstating by about 50 per cent the number of screens in its digital display advertising network across the mainland.
Focus Media chief executive, Shanghai-born Jason Nanchun Jiang, "was very angry. At one point, he was seriously thinking of suing Muddy Waters", said a person close to Jiang. But he gave up on that idea, figuring the chances of winning were slim, and embraced a buyout.
Jiang's idea to privatise the company quickly won support from mainland private-equity firms including Citic Capital and FountainVest Partners, investment company China Everbright and the US buyout giant Carlyle Group, which all agreed to help Jiang finance his deal.
"We've been friends for many years, so we trust Jiang's personality and we share the same view in this case. Muddy Waters is one thing. The other thing is the share price of Focus Media has been undervalued for a long time because US investors don't understand its business model very well," according to a person connected to the deal.
Technology-related Chinese companies turned to the tech-heavy Nasdaq mainly because they thought their stock would be actively traded and highly rated by Western investors. Focus Media raised more than US$170 million through an IPO in July 2005 in what was then the largest Nasdaq listing by a Chinese company.
The shares rode the "China story" to peak above US$66 in November 2007. The stock dived 40 per cent in a single day last November when the Muddy Waters report was published. Since the privatisation bid was announced, they have been trading below the offer price of US$27.
"You cannot always look at things from a very American perspective and I think this has been a problem for US investors, not just in the case of Focus Media but also for many other Chinese companies listed in the US," the person added.
For example, some US investors and analysts believe American investors can't see Focus Media's attraction because they aren't familiar with the kind of captive audience that the company's display ads -located in office buildings, often near lifts - play to.
"If you go to an office building in Shanghai you will see many employees have to queue in front of the lift and they will naturally notice what is being shown on the advertising screen. In the US, you have fewer people, so you have less time to wait in the queue," the person explained.
Chinese investment bankers contended that several Chinese online gaming companies suffered from the same lack of understanding of their investment stories, which left their share prices undervalued.