When China's markets were flourishing earlier this year, at least two dozen U.S.-listed Chinese companies, including dating sites and game developers, entertained offers to go private. Their goal was to buy up their U.S.-listed stock, return to China, and relist there with high valuations. However, the recent sell-off has put those plans in limbo.
The Shanghai Composite Index is down 29 percent since mid-June, and the small-cap Shenzhen Composite Index, where many tech and Internet companies are listed, is down even more. Among the steps that Chinese officials took to try and stop the decline was to suspend the initial public offerings of shares.
The CEO of Internet security firm Qihoo 360 Technology Co. announced a $9-billion buyout offer in June, the biggest such deal of the year. But investors did not seem to follow expectations; with the offer priced at $77 per share, Qihoo's stock fell from a high of $71 to $63.25 Tuesday, a 19-percent discount to the offer price.
"It's hard to be optimistic about these Chinese companies' journey home, given the deterioration of the Chinese market, the relatively consuming process of delisting and relisting, as well as the regulatory and compliance uncertainties," said Su Jie, a senior researcher at Bank of China Hong Kong.
Chinese tech and Internet companies listed in the U.S. in droves over the past decade, mainly due to the rigid market criteria in their home country. An A-share listing in China, for example, requires a company to be profitable for at least three consecutive years.
Now, many companies desire to go back to China. They feel that their business models are underappreciated by U.S. investors and fare better with Chinese investors who are more familiar with their businesses.
Although China's public markets are known to be chaotic, the private investment market shows domestic demand remains robust. Firms have invested $5.1 billion in Chinese startups during the past four weeks despite the stock market slump, up from $2.3 billion over the same period a month earlier, according to pedata.cn in Beijing.
Sinocampus, a startup that connects exchange programs between Chinese and Western universities and high schools, is one of the hundreds of Chinese startups that planned to go public in the U.S. Founder Wang Xiaoyu said that he began to think about listing in China instead in late February amid the booming Chinese market. He aims to sell shares later this year.
"We're an education company. The other countries won't value education as China does," he said.
The stock market sell-off was seen as a purchasing opportunity for some U.S.-listed Chinese firms, including streaming video operator YY Inc., online retailer E-Commerce China Dangdang Inc., and China Nepstar Chain Drugstore Ltd., all of which got offers within days of the market's bottom.
In a letter to her employers, Dangdang chair Yu Yu explained their decision to privatize her company. "Dangdang's current market capitalization in the U.S. at about $500 million does not reflect the company's true value," she said.
The biggest question now is how long China's IPO ban will last. In the past, IPO suspensions in China lasted between four months to a year. It is estimated that the entire process of delisting and relisting could take more than two years. Some experts say that China's campaign of internationalizing the stock market and financial system in general means the IPO suspension could be far shorter than expected.
Ran Wang, chairman of investment bank eCapital, does not believe that the current economic troubles will stifle the desire of Chinese companies to return home.
There will be more mergers and acquisitions in the second half and that some companies may find a way back into the markets by acquiring other publicly listed companies.
The deal-making continued during Monday's sell-off. China's Xueda Education Group agreed to be purchased by a subsidiary of state-owned technology investment firm Tsinghua Unigroup. Xueda Education is expected to delist from the New York Stock Exchange and plans to become listed in Shenzhen by the end of this year.