INTERNET: New Intrigue at Qihoo With Coolpad Move, Insider Trading Charge
Bottom line: Qihoo is likely to soon take control of Coolpad by buying shares from its controlling stakeholder, while allegations of insider trading surrounding Qihoo’s recent buyout bid are unlikely to affect the company.
Security software specialist Qihoo 360 (NYSE: QIHU) is in a couple of noteworthy headlines as we end the week, led by an announcement that hints it could be close to buying a sizable stake in its smartphone partner Coolpad (HKEx: 2369). At the same time, Qihoo’s name has appeared in another headline that says a Guangzhou man is being accused of insider trading related to a plan announced last week to take the company private.
These 2 headlines aren’t really too related beyond the fact that they both involve Qihoo, whose aggressive business tactics and outspoken CEO have made the company a lighting rod for controversy. The Coolpad news reflects Qihoo’s recent aggressive push into smartphones, mirroring similar actions by many other Chinese Internet firms. The insider trading news is more reflective of China in general, where such dealing is rampant and largely tolerated by a securities regulator that has other larger issues on its agenda.
Let’s begin with the Coolpad news, which is far more significant for Qihoo as it seeks to transform from its roots as a software security specialist to a more diversified Internet services company. As part of that transformation, Qihoo late last year formed a joint venture with Coolpad, a leading domestic Chinese smartphone maker that was getting squeezed for cash amid intense competition in the market. (previous post)
That alliance saw Qihoo pump $410 million into a new joint venture that presumably contained a big portion of Coolpad’s smartphone-making assets. Now it looks like Qihoo could be getting ready to invest in Coolpad itself, with word that one of Coolpad’s largest shareholders is preparing to sell its stock in the company.
According to the reports, Data Dreamland Holding Ltd is close to a deal to sell some or all of its 1.66 billion Coolpad shares, which account for about 38 percent of the smartphone maker’s total stock. Coolpad stock was suspended pending the announcement, but Data Dreamland’s stake is worth about $600 million based on the company’s last closing price in Hong Kong. That kind of price is certainly quite affordable for Qihoo, which would get effective control of Coolpad through such an investment combined with its existing joint venture stake.
Next let’s look at the insider trading news, whose origin lies in Qihoo’s announcement last week that it had received a management-led buyout offer to privatize the company at a 17 premium to its stock’s last closing price. Now media are reporting that the US Securities and Exchange Commission (SEC) has frozen the assets of a Guangzhou man they suspect knew about the privatization news before it was announced, and used the information to make some quick profits.
According to the reports, the SEC is accusing the man, Luo Haijian, of making $1 million in illegal profits by trading in Qihoo call options before the deal was announced. (English article) The regulator added that Luo had no history of trading in Qihoo shares, and believes he was tipped off to the privatization by someone who knew about the deal and used him to benefit from that information.
This kind of use of third parties is quite common in China, and sees company insiders conduct illegal trades through friends and relatives to try and hide their action. In this case the company insider was a bit unlucky, since Qihoo’s shares are only traded in the US where the regulator is far more aggressive than in China. I doubt this particular action will have any big implications for Qihoo itself. But that said, company insiders must certainly be looking forward to Qihoo’s departure from New York and a possible re-listing in China, where their illegal activity is far less likely to result in any serious enforcement action by the Chinese securities regulator.
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