Hartcourt Makes a Troubled Bid for China Infohighway
By Douglas C. McGill
News Editor, ChinaOnline
(5/12/99) The Hartcourt Companies Inc., a Los Angeles-based holding company that says it
has agreed to buy 90% of a Chinese internet service provider worth US$80 million, is a shell
company formed last year to "reap a short-term windfall" in "the stock market of a New World
Order," the company's chairman told his investors in a letter last week.
"We must cast aside a lot of textbook principles and age-old experience in management to
keep up with increasing demand from shareholders who are now used to the average gain of
300 percent on Internet stocks," the chairman, Dr. Alan V. Phan, wrote in the letter.
On March 23, Hartcourt said it would buy a majority stake in China Infohighway, which was
formed in Beijing in 1995 as one of China's first private internet service providers. In
Hartcourt's written announcement of the deal, it said China Infohighway was "the exclusive
commercial internet provider in China."
That story, originally published on the PR Newswire, was picked up and reported in
newspapers in China, Hong Kong and some business web sites, including ChinaOnline.
On April 8, China Infohighway released a statement saying Hartcourt's announcement was
"just a rumor," and that "China Infohighway has never contacted Hartcourt about business
opportunities and cooperation."
In a telephone interview yesterday, Phan said Hartcourt and China Infohighway had signed a
share purchase agreement last September that was still in effect. A recent change of
management at China Infohighway, however, was not keen on the deal and so denied
knowledge of it in their own statement, Phan said.
Management Reshuffle
In June 1998, three months before Phan said Hartcourt signed its deal with China
Infohighway, Zhang Shuxin, the Chinese company's president, resigned after quarrelling with
others about the company's focus and mission. In November, she was followed by 15 other
top executives including sales managers and regional office heads, who shared her vision
and differed with the direction taken by new management.
Since that time, there has been no report of change in the company's top management.
Hartcourt also said in its original announcement of the purchase that China Infohighway was
worth US$80 million, based on an "independent evaluation," and that the company had
100,000 subscribers who generated US$16 million in revenues in 1998.
Last September, when the company underwent a reorganization, it had registered capital of
RMB 80 million (US$10 million), according to its website. As of August, 1998, China
Infohighway claimed to have more than 60,000 subscribers to its website nationwide, with
50,000 using its e-mail services. It has never published its revenue figures, but the Diannao
Bao (China Popular Computer Weekly), a Chinese computer newsmagazine, has said the
company's expense-to-revenues ratio fell from 9.2:1 in 1997 to 3.5:1 in 1998, and that the
drop was due to falling expenses, not increasing revenues.
Phan said yesterday the $16 million in revenues his company's announcement cited for
China Infohighway in 1988 came in part from other sources than the company's internet
operations, but he did not specify.
"What's Yahoo Worth?"
As for Hartcourt's claim that China Infohighway was "the exclusive commercial internet
provider in China," Phan said yesterday he agreed the phrase was misleading.
"It's a goof and I admit my mistake in terms of not reading it carefully and deleting it out," he
said. "It should have said the exclusive commercial internet provider in the 21 cities where it
operates."
Later in the telephone interview, however, Phan said that China Infohighway only has a
license to operate in 21 cities, while actually operating in "15 or 16." In addition, he agreed
that it might be possible that more than one internet service provider can provide commercial
internet services in any given city. Indeed, in most of China's big cities, many internet service
providers compete with each other to provide internet connections to businesses.
The company's US$80 million valuation, Phan said, was determined by a Beijing accounting
company named China Y.X. Properties Valuation Company. A fax copy of their assessment
provided by Phan gave two values for the company. Its "assets value on the account,"
representing the company's tangible assets such as building and equipment, accounts
receivable and inventory, totalled RMB 163,630,000 (US$19,785,973).
Its "assets evaluation value" was listed as RMB824,710,000 (US$99,723,095) and reflected
intangible assets such as licenses held, goodwill, and an internet premium.
"Look at Yahoo," Phan said. "What's Yahoo worth?"
The share purchase contemplated in the agreement Phan says was signed last September
called for the issuance of US$80 million in new shares of The Hartcourt Companies Inc.,
which would be used to buy an 85% share of China Infohighway.
At the same time, US$40 million in cash provided by a second investor would be used to pay
off debt, improve facilities, and to buy 30 percent of the company, Phan said. At the end of
the deal, then, the company would be 55% owned by China Infohighway, 30% by the second
investor, and 15% by Hartcourt.
Phan would not name the potential second investor, except to say it is "a very big and
reputable investment banking firm" which runs a fund that specializes in direct investments in
China. The fund, he said, is run out of a Chicago office and has US$1.6 billion in assets, of
which US$700 million is already invested in China.
Mission Accomplished
In his April 30 letter to investors, Phan explained that Hartcourt had been reorganized last fall
to create two companies. One of them, Hartcourt, is "now just a shell with approximately $10
million in marketable securities and an investment in a Chinese pen factory." The pen
factory, Xin Hui, is in Guangdong province and is worth $11 million, Phan said.
The second company resulting from the reorganization is Enova, which manufactures
environmental clean-up equipment including vapor extraction pumps and landfill conveyors.
"We remain faithful to our passion and mission of environmental clean-up," Phan wrote.
As for the plan to buy China Infohighway, he added: "We created an internet company to
satisfy short-term shareholder demand. Upon completion of such merger, present board
members will resign, shareholders will reap a short-term windfall, and the mission is
accomplished."
To reach Douglas C. McGill:
dmcgill@chinaonline.com |
