Outlook Hazy For Cloudary IPO
Last month’s New York IPO filing by online retailer LightInTheBox has many predicting a new stream of Chinese listings could soon hit the market, prompting many to guess who might be next. One of the leading candidates for a near-term New York offering was Cloudary, the literature unit of online entertainment firm Shanda, though that prospect is dimming with each passing day due to recent turmoil at the company.The story began in mid-March, when a large group of mid-level managers suddenly resigned en masse for unexplained reasons. (previous post) Some initially speculated the departure could be part of an overhaul by Cloudary’s recently named chairman, but sources later indicated the group of defectors were actually planning to set up their own rival online literature firm. They were initially planning to leave gradually over a few months, but were suddenly forced to resign en masse when their plan was discovered, according to one of my sources.
Now in the latest twist to the story, this group of former Cloudary employees has just received an investment from Tencent (HKEx: 700) and will provide online literary content to the Internet giant. (English article) The reports say that search giant Baidu (Nasdaq: BIDU) had also approached the new company about a similar tie-up, but that the group ultimately chose Tencent.
On a broader level, the fact that this kind of start-up attracted such interest from 2 of China’s largest Internet companies underscores the huge growth potential for online literature. During my regular commutes on the Shanghai subway, I would estimate that as much as half of the passengers using their mobile phones are reading online literature or news, while the rest engage in other pastimes like online games or social networking. While full of potential, the online literature industry is also quite risky due to the ease of pirating such material.
Moving back to Cloudary, clearly another major risk was this kind of mass defection, which will leave a huge hole in the company’s management. Cloudary’s CEO moved quickly to try and calm concerns back in March, but the company has been quiet since then as it scrambles to try and replace all of those lost managers.
Cloudary should be getting used to this kind of turbulence, since the company has faced numerous obstacles in its expansion over the last 2 years, particularly in relation to its planned New York IPO. Cloudary first filed to make such a listing in the summer of 2011, seeking to ride a wave of successful similar IPOs from the previous year. But investor sentiment suddenly chilled around that time after a series of accounting scandals at several other US-listed Chinese firms. Cloudary refiled for the offering in February last year, but ultimately had to terminate the plan again as investor sentiment remained weak.
The defection in March, followed by this latest tie-up between the former employee group and Tencent, will probably further delay the Cloudary IPO plan, and could even temporarily push the company back into the red after it posted its first profits last year. I began this post by asking who the next IPO candidate might be after LightInTheBox, as a number of candidates have been mentioned including online clothing retailer Vancl and the video sharing service operated by web portal Sohu (Nasdaq: SOHU). But the chances that Cloudary will be among that group are looking dimmer and dimmer, and I wouldn’t be surprised if 2013 ends without any IPO from this promising but unlucky company.
Bottom line: A new online literature alliance between Tencent and former Cloudary workers will further undermine Cloudary’s planned IPO, which is unlikely to happen this year.
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