Qihoo's call on Coolpad leaves shareholders on hold
- Qihoo has boosted its share of the Coolpad joint venture from 49.5% to 75%
- The US-listed Chinese software firm is acting like a private company
- The company's ongoing privatisation bid remains up in the air
- Qihoo needs to properly communicate its intentions to shareholders
By Neil Flynn
The issue of corporate governance among US-listed Chinese firms has reared its ugly head again, after Qihoo signalled its intention to cash out of its smartphone joint venture amid corporate disagreement, only to increase its holding from 49.5% to 75% shortly afterwards.
In December, Qihoo entered into a joint venture agreement with domestic smartphone manufacturer Coolpad in order to produce a range of smartphones called Dazen. The concept was sound, because the hardware would be built by Coolpad and the software would be developed by Qihoo, offering customers a 'best of both worlds' product.
Concerns about the sustainability of the joint venture arose when LeTV acquired a stake in Coolpad. LeTV is an online video platform that has since moved into smartphones, smart TVs and is currently developing an electric supercar.
Qihoo's activated clause would have required Coolpad to buyout Qihoo’s 49.5% stake for approximately $500 million, which never looked feasible, given that Coolpad’s market capitalisation is only $700mln. It became clear that it was just a power play, with Qihoo wanting nothing more than to gain further control of the joint venture and to marginalise LeTV’s involvement in Coolpad.
With Qihoo now holding a dominant share in the joint venture, and presumably a form of Chinese wall to make sure that LeTV can’t use any of its technology, where does this leave Coolpad and LeTV?
On a wider view, it raises concerns of the levels of corporate governance that US-listed Chinese firms have in regards to shareholder clarity. I have been forthright in my criticism of Qihoo for failing to hold an earnings conference call after the release of its second-quarter earnings, the first since the announcement of the privatization bid.
With the Coolpad concerns seemingly over, it has added to my concerns about Qihoo, on top of management’s lack of clarity towards the outstanding buyout bid, which is all but dead in the water. It is, in a sense, acting like a private company, which is all well and good given that the company is clearly moving in that direction.
– Edited by Robert Ryan
Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.