I've taken my money off of the table on China's Qihoo 360 Technology (QIHU) now that the U.S.-listed company's management has approved a $77-a-share "go-private" offer led by CEO Hongyi Zhou and President Xiangdong Qi.
With Zhou and Qi controlling over 60% of the company's voting interest, there's not much shareholders can do to block the deal or force a higher price despite my view that Qihoo is worth at least twice the offer.
Shareholders had their chance to drive the price higher by buying up stock ahead of the offer's acceptance, which might have forced Zhou and Qi to boost their bid. But even though the pair announced their offer back in June, QIHU never went past the $77 per share level despite the fact that Chinese markets were at their peak back then.
That's also around the time that these Chinese go-private offers started rolling in. Chinese executives shrewdly (and rightly) picked up on the valuation differential to be had by taking their U.S.-listed firms private for a small premium, then relisting on Hong Kong or China proper at a significantly higher valuation.
I took the proceeds from my QIHU sale and invested them in Sohu.com (SOHU), which I expect will see its own go-private bid soon enough. Sohu CEO Charles Zhang has already made an offer to invest up to $600 million in the company in exchange for shares and convertible notes -- with one major caveat. His offer capped the share price at $50 per share.
Why did Zhang offer to put millions into SOHU?
Simple, I believe. He currently controls about 20% of SOHU, but I think Zhang wants to increase his stake enough to get voting control (or at least a large portion of the vote). Once the CEO does that, I believe he'll make a go-private offer and do what other Chinese executives have done.
Of course, it seems like investors have finally wised up to these go-private deals. SOHU traded above $50 per American Depositary Share the day before Zhang's offer, but has since risen to $58 or so. If Sohu management has lined up a consortium to take the company private, it will have to make an offer soon or risk watching the shares climb even higher.
However, Sohu had almost $30 per ADS in cash as of Sept. 30, and analysts expect the company to turn a profit in 2016 -- which means cash per share will likely rise even higher going forward.
As such, I expect one of two things to happen:
- Zhang will raise his offer to invest in the company, then put his money in pretty soon at levels north of $58 per share. That will ensure that the CEO boosts his stake beyond its current 20%, but also likely sets a floor on the stock going forward.
- Alternatively, Zhang might simply step in with a go-private offer soon at a price north of current levels.
So, it looks like yet another Chinese CEO thinks he can take his company public twice (once here and once in China). However, at least U.S. investors can make it more expensive that they did for QIHU's management.
May your trades always be in your favor!