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Qihoo 360 completes delisting from NYSE, targets A-share market

A Qihoo 360 sign is placed next to the US and Chinese flags outside the New York Stock Exchange before the company's IPO in March 2011. Photo: Reuters

Qihoo 360, one of China's largest technology companies, has announced the completion of its delisting from the New York Stock Exchange (NYSE) in a $9.3 billion deal, the biggest in a buyout spree that has seen dozens of Chinese companies delist from American bourses and instead relist on domestic boards at higher valuations.

An investor group including CITIC Guoan, Sequoia Capital China, Huasheng Capital and Ping An Insurance acquired Qihoo 360's all ordinary equities traded at the NYSE for $51.33 in cash per ordinary share, or $77 in cash per American depository share.

Qihoo 360 Chairman Zhou Hongyi, who led the consortium, said that the decision was made out of the consideration that the $8 billion market capitalization did not represent the real value of his company, as the Beijing-based firm is seeking robust fundraising channels for its business expansion. Besides developing security software for personal and corporate users, Qihoo 360 has cannibalized funds for smartphone and smart hardware.

At least 47 such privatization offers have been announced since the beginning of 2015, according to data compiled by Bloomberg News, as US-listed Chinese companies were encouraged by Focus Media, a Shanghai-based outdoor advertising firm which went private and retreated from the NASDAQ in 2013 after a short-selling attack, and then listed on the Shenzhen bourse via backdoor listing in 2015 when its market capitalization was much higher than that at the time of privatization two years ago.

In an internal letter to the staff, Zhou said that the decision of privatization was made after careful consideration about the differences between the capital markets in China and abroad, and that it would be the first step in accelerating the upgrade of Qihoo 360's business and augmenting its growth potential.

The US capital market has been a popular destination for the Chinese Internet and technology firms to list. But faced with accounting scandals and attacks by the short-selling firms like Muddy Waters Research in recent years, an increasing number of Chinese firms have announced plans to delist from the US stock exchanges and instead relist domestically for the sake of a higher valuation, and because domestic investors are more familiar with their businesses than American investors. In addition, China's A-share market has gradually rallied from last summer's rout that vaporized as much as $5 trillion in share value, further encouraging overseas-listed Chinese firms to head back home.

Backdoor listing

Industry insiders predict that Qihoo 360 is very likely to follow in the footsteps of Focus Media by selling its main assets to a smaller shell firm already listed in China's A-share market for a controlling stake in the listed firm.

The backdoor listing approach provides overseas-listed Chinese companies with a more convenient and faster path to China's A-share market than queuing up to enter the high-threshold Shanghai and Shenzhen stock exchanges under the lengthy initial public offering process where hundreds of companies reportedly are waiting for listing, with some even worrying that some well-connected companies may cut in.

But some analysts argue that backdoor listing, which usually guarantees a high valuation, will drain capital from the market and cause volatility.

Zhou revealed that the Chinese government wanted Qihoo 360 to come back to the Chinese mainland as concerns over cyber security are growing, according to "Returning to China will make it easier for Qihoo 360 to receive security-related orders from the military," quoted Zhou as saying.

To be listed in the A-share market through backdoor listing, an enterprise is stipulated to have robust financial performance for at least three consecutive years and sufficient cash flow, with its shareholders subject to a lengthy period of being barred from selling or transferring shares

In April, Hang Ren Partners LLC, a Boston-based research firm, released a report in which it said US-listed Chinese companies were making use of a regulatory gap to buy out their shareholders at lowball prices.

"These lowball offers are not due to a lack of cash...Many of these company owners not only give themselves a bargain when taking full control, but the companies depart the US for China much stronger financially after having tapped the US market," said the report.

The report also pointed out that it is a trend for Chinese companies to buy out US shareholders, delist from US stock exchanges and then gain a higher market capitalization through a relisting in China.

Regulatory uncertainties

The Chinese government seems to have been cautious about privatizations of Chinese companies listed on US stock exchanges, as reflected in the fact that China's State Administration of Foreign Exchange (SAFE) ordered the Qihoo 360 investor group to move the buyout funds offshore in several batches due to concerns that the large fund outflow would increase depreciation pressure on the yuan.

China has been controlling capital outflows and luring the offshore yuan back through a series of policies. In June, China granted 250 billion yuan investment quota to US investors under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, a financial mechanism launched in 2011 to broaden international use of the Chinese currency, besides curbing capital flight.

China has been trying to control fund outflows following a $48.5 billion wave of privatization offers by US-listed Chinese companies since the start of 2015, said Bloomberg News. Chinese companies need approval from the SAFE to convert large sums of yuan into a foreign currency.

In May, the China Securities Regulatory Commission (CSRC), the country's securities watchdog, said in a regular briefing that it was studying the market impact of the overseas-listed Chinese companies relisting on the domestic stock exchanges via IPOs, mergers and acquisitions, and restructuring, which is widely seen as a bad news for the overseas-listed companies seeking relisting in China via backdoor listing.

In fact, Qihoo 360 is among a few US-listed Chinese companies which succeeded in coming home to relist on Chinese stock exchanges.

Before the CSRC announcement, there had been rumors that the Chinese government would curb domestic relisting of overseas-listed Chinese companies.

During China's annual parliamentary session held in March, a plan to create a strategic emerging industries board on the Shanghai Stock Exchange was removed from the draft outline of the country's 13th five-year development blueprint (2016-2020). The board is widely regarded as a new fundraising platform for innovative small and medium-sized enterprises and the overseas-listed companies seeking a relisting at home. The cancellation of the board will leave shell companies as the only target that overseas-listed companies could use to relist in China via backdoor listing.

Some analysts say that the National Equities Exchange and Quotations (NEEQ) market, also known as the New Third Board (NTB), could serve as an arena where returned Chinese companies can trade their equities. But in the light of limited liquidity, the NTB may find it hard to raise enough funds for enterprises like Qihoo 360.

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