INTERNET: Battle Rages for Sina Board Seat

Bottom line: A dissident shareholder’s proxy battle for a seat on Sina’s board stands a chance of success, but the odds are probably 40 percent or lower due to large holdings by Sina’s CEO.

One of the more lively investor plays to shake up an insular US-listed Chinese company is taking place at Internet stalwart Sina (Nasdaq: SINA), with a flurry of he-said-she-said statements coming from the company and dissident shareholder Aristeia Capital. This somewhat unusual development first made headlines about a month ago, when Aristeia unexpectedly announced it was nominating two people to Sina’s board to shake up the company. Sina has responded with its own series of announcements justifying why its own long-serving board members are the best fit for the company.

All of this will come to a head at Sina’s annual meeting on Nov. 3, when one of its five board members will stand for re-election. Sina wants its own long-serving candidate to win the spot, while both of Aristeia’s candidates are contesting the position. What’s interesting here is that Sina is one of the few US-traded Chinese companies where the founders and top managers really don’t have the kind of overwhelming control of its stock that you often see. That means this particular board seat could really be up for grabs, which could perhaps shake up this underperforming company.

I’ve gone and dug up Sina’s latest annual report to see just how much of the company is controlled by its top executives, who would presumably vote for the establishment candidate. I’ll return to that topic shortly, but first let’s recount the latest developments and briefly trace the history of how we got to this point.

Sina is one of China’s oldest Internet names, and is still quite respected for its widely visited news and web portal. But the company has been overtaken over the years by other younger companies like Tencent (HKEx: 700), Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU), which are now worth far more. Sina’s one relatively big recent success is its Twitter-like Weibo (Nasdaq: WB), which it spun off and separately listed but which it still holds a sizable stake in.

One of the big issues with Sina is that the value of that Weibo stake is now worth more than Sina’s total market capitalization — a fact that hasn’t escaped the attention of Aristeia or others. That implies that investors think Sina itself, minus the Weibo stake, isn’t worth much, or has negative value to be precise.

Such undervaluation underscores a lack of investor confidence in the company’s leadership, which is where Aristeia comes in. Aristeia is proposing two possibilities to right Sina’s ship, both of which look reasonable to me. One would see Sina sell its Weibo stake and distribute the proceeds to its shareholders, which would allow them to quickly recoup the money they’ve invested in Sina stock. The other would see Sina sell itself outright, which also seems like a good idea. The company is still a well-known and respected brand, and in the hands of a larger and better-run player like NetEase (Nasdaq: NTES) or Tencent could possibly perform much better.

Whose Best Interest?

I won’t go into too much of the he-said-she-said war of words that has emerged, but here are some links to the latest materials from Sina and Aristeia. Sina basically argues that its board members understand China and have served the company well, while Aristeia says the board is lacking in fresh ideas and beholden to longtime CEO and Chairman Charles Chao.

All that said, let’s move on and close with a look at how this battle could shape up. According to its annual report, which may be slightly dated, Charles Chao directly controls about 31 percent of Sina’s stock, and the number goes up slightly to 32 percent if you count the company’s other top managers. Aristeia is a relatively small stakeholder, with about 4 percent. The only other noteworthy names are two fund managers, Schroder and Macquarie, which each hold about 5.5 percent and could easily vote with Aristeia.

The bottom line, in my view, is that this really could go either way. One-third of the votes held by Chao will obviously go to the old nominee, leaving Aristeia to try and muster up the more than half of all votes it needs from the remainder. That will make it a little more difficult, since probably at least 10 percent of the shares won’t vote, leaving about 56 percent of shares up for grabs. If I were a shareholder, I would probably vote for one of the Aristeia candidates just to shake things up. Now we’ll have to wait and see if enough other votes think that way as well.