BUYOUTS: New Oriental Commits to US, Qihoo to China
Bottom line: New Oriental’s special dividend sends a signal that it has no plans to de-list from New York, even as short-sighted companies like Qihoo continue buyout plans in pursuit of higher valuations in China.
Nearly 2 weeks after the last US-listed Chinese companies announced plans to privatize, education specialist New Oriental (NYSE: EDU) is sending a different signal that indicates it has no plans to abandon its New York listing anytime soon. That signal comes in a footnote to New Oriental’s newly announced quarterly earnings, in which it declares a rare special dividend — something you wouldn’t expect a company to do if it was planning to soon de-list.
At the same time, software security specialist Qihoo (NYSE: QIHU) is reaffirming its previous plans to push ahead with its privatization scheme, even as investors remain skeptical that this particular deal could fall apart. Qihoo is easily the largest of China’s companies looking to privatize so far, and clearly investors are worried that the company won’t be able to complete its buyout worth nearly $10 billion due to the recent market volatility in China.
Let’s begin with New Oriental, which isn’t a company I write about very much due to its slow growth. Such anemic growth has led to lack of investor interest, which is the main factor now prompting many US-listed Chinese companies to privatize. New Oriental certainly fits that profile, with the company’s shares now trading slightly below their level from 5 years ago, even as the broader US markets have surged over that time.
New Oriental’s latest quarterly results show why investors aren’t so interested in the company, with revenue up 14 percent and profits down 18 percent for the period. (company announcement) But what caught my attention was the company’s declaration of a modest but unusual special dividend of $0.40 per American Depositary Share (ADS), equating to return rate of about 1.7 percent.
Such a dividend is relatively small and will only cost New Oriental $63 million. But it sends an important signal that New Oriental is committed to its New York listing, since a company preparing to privatize certainly wouldn’t feel the need to curry investor favor by offering this kind of cash reward.
The company’s shares actually surged as much as 5.4 percent in trading after it announced the quarterly results, though they ultimately only closed up 0.6 percent. I would personally commend the company for sending this kind of signal, and also for its apparent decision to stay in New York. China may offer better valuations right now, but it’s hardly a place for serious companies due to high volatility and lack of sophistication among its investors.
Qihoo Pushes Ahead
Those negative elements don’t seem too worrisome for Qihoo, whose president Qi Xiangdong has said in an interview that his company’s privatization plan is proceeding on schedule and that Qihoo plans to re-list in China. (Chinese article) US investors seemed encouraged by the comments, bidding up Qihoo shares by 3.5 percent in the latest session in New York. But the shares still trade at 15 percent below their offer price, indicating there’s still quite a lot of skepticism.
Qihoo made its comments after online dating site Jiayuan (Nasdaq: DATE) similarly reaffirmed its previously announced de-listing plan. (previous post) I do think that many smaller companies like Jiayuan that were early to announce their privatization plans could succeed. But larger companies like Qihoo that disclosed buyout plans at the height of a wave of such announcements last month could have more difficulty.
At the end of the day, I do think New York isn’t the best place for all Chinese companies to list. Smaller names like Jiayuan will have trouble getting noticed and could also easily become victims of short sellers, making the cost of maintaining such a listing not worthwhile. But I do think the US is the right place for bigger, industry-leading names like Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Ctrip (Nasdaq: CTRP), and don’t expect to see any of those abandon New York anytime soon.
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