Companies
Gome spat stirs up challenges
By Bao Chang (China Daily)
Updated: 2010-09-20 09:59
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Currently, the investment market in China is oversupplied, so both domestic and foreign investors are striving to find a promising company with a good brand image to ensure strong returns, said Sang.
James Zhang, an investment banker, said, "Probably Bain originally intended to control Gome through buying convertible bonds and transferring them to an equity stake at a suitable time. It's not a conspiracy between Chen and Bain, as some netizens claim, because the final aim of a private equity firm is pursuing profits by controlling the company without involving personal emotions."
With an increasing number of foreign-invested projects, founders of Chinese companies have begun to realize the market value of their brands and the importance of managing them, said Sang from UIBE. Inciting people's nationalist sentiment was one of Huang's strategies to get support from the public to help him retain control of Gome.
"It's hard to judge each party on moral grounds, as each person is pursuing his own interests under normal business principles. Huang is exercising his rights as the largest shareholder to maintain his governance of Gome and Chen Xiao and Bain Capital are seeking more profits by wresting Gome's control from Huang," Sang added.
Sources close to Huang claimed it was unfair that a financial investor (Bain) that held a relatively small shareholding had such representation and influence over the company's board. Bain currently holds four positions on the board of Gome: three non-executive directors and one independent director. However, it is becoming a decision-making shareholder of Gome rather than just a financial investor.
The Boston-based private equity firm converted its 1.59 billion yuan bondholding in Gome into a 9.98 percent equity stake, becoming the second-largest shareholder of Gome and diluting Huang's holding in the company from 36 percent to 32.47 percent last Wednesday.
The bond conversion will give Bain more votes at the upcoming shareholder's meeting on Sept 28, when shareholders decide whether Chen and three executive directors representing Bain will remain.
However, Tang Jiarui, an analyst at Everbright Securities, expressed doubt about Bain's intentions at the special meeting, citing the famous remark by British wartime Prime Minister Winston Churchill, who said: "No permanent enemies, no permanent friends, only permanent interests."
Tang said: "For Bain Capital, the total asset value of Gome's listed and unlisted retail stores is very attractive."
According to Tang, Huang's wife Du Juan promised to put Huang's 400 privately-owned stores into the company's public section on condition that Bain stand by Huang at the special general meeting.
"Founding shareholders would welcome the opportunity to work with Bain, as Bain's interests would seem to be more aligned with that of all ordinary shareholders, after it converted bonds into ordinary shares," Huang declared in a statement released last week.
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He said: "If Huang wins, he will expand Gome's market share by opening more retail stores in key areas. This will bring more difficulties to Suning's expansion plans. On the other hand, if Chen wins, Gome will probably be overtaken by Suning because of his strategy of improving profits at the expense of losing market share."
The struggle to control Gome between its jailed founder Huang and executives has stirred heated discussion among Internet users and experts. A survey at qq.com, one of China's most popular portals, attracted over one million Internet users. More than 879,000 Internet users, or 77.24 percent of the total voters, supported Huang, a Xinhua report said last Sunday.
Once the disparity between the two competitors' market shares increases, it will be very hard to recover the situation, Tang said. Meanwhile, investment banker Zhang said: "With the development of China's economy, there will be more similar commercial cases and Chinese entrepreneurs will also meet challenges from their management and foreign investors in their public companies."
Trying to balance the relationship with foreign investment was a new challenge for Chinese entrepreneurs, he added. Miao Liansheng, president of Yingli Solar Group, said that he maintained control of his company by keeping the stake of each foreign investor below 5 percent in the New York-listed company.
"Foreign investors are friends and we have good cooperation to develop Chinese companies into global industrial giants," he said. With the rapid growth of China's economy, foreign investment and management skills are needed by Chinese companies. With the growing size of their investment, overseas companies will be increasingly integrated with Chinese companies' operations, Sang from UIBE said.