As Tudou looks set to finally IPO any day now a lot of questions are being asked. Some people are scratching their heads to understand why the company is pushing forward with its plan to go public, even though the conditions seem anything but good.
The company has had what might be called an on-again-off-again relationship with its US listing, mainly due to issues related to the divorce of the CEO and owner, Gary Wang. In this proceeding the ex-wife of Mr. Wang sued to get 76% of the company’s operational VIE. This was then settled but the company has still struggled to get its IPO underway.
There are some serious issues to be raised here, and investors should take them into account when deciding on the stock.
1. Tudou operates in the highly saturated and competitive online video market in China, it’s the second largest player by market share after Youku. However, it is trailed by many other players, including Xunlei, and Baidu’s Qiyi offering, and some of these are rapidly gaining ground. So the company is second in the market and trailed by many fast-growing alternatives, its competitive position should hardly be described as strong.
2. The business itself is stretched. The company is in a similar situation to where market leader Youku was a year ago: it’s not making money, and needs some way to secure financing for its continued operations. The big difference here is that Tudou actually filed for an IPO before Youku, but due to a constant inability to see it through they have lost the confidence of many potential investors
3. The current market conditions for Chinese companies might be described as hostile at best. Too many frauds have surfaced, and there is widespread skepticism about almost every Chinese company listed overseas.
4. The company has probably the most insecure VIE structure I have ever witnessed. There has been no attempt to align the interests of VIE owner and new investors, the VIE can operate entirely on its own, and to top it off the actual ownership is still in question.
Even though Mr. Wang has settled his divorce the settlement is dependent on his former wife receiving cash payments before and after an IPO. As far as we know there are no other conditions but I have yet to see any full disclosure on this point. If Mr. Wang fails to meet his obligations his ex-wife may still be entitled to 76% ownership of the VIE, in which case it would be up to her whether the VIE will continue to operate as a part of Tudou or not. As the divorce appears to have been nothing but messy I’d bet on the second option.
So why is Tudou pushing through its IPO in these conditions?
Best guess at this stage is because they had to do it, the current conditions have left management with no other option readily available. The company needs the money, and perhaps more importantly Mr. Wang needs to pay off his ex-wife. So with the backs against the wall they have no option but to bravely press on.
As for the question of who would be brave enough to purchase stock in a company operating in a saturated, highly competitive business with little history of profits, and has repeatedly failed to conclude its IPO, and also risks losing its entire operations depending entirely on actions not associated with the business, in a hostile market… We’ll just have to wait and see.