tom.com (8001) Blows Cash to Acquire Yazhou Zhoukan
Mar 05, 2001 - 12:17:21 HKT
QuamResearch
In the Internet world, growing through acquisition is quite usual for portal operators, especially since they can use consideration shares to buy assets, and such a method can certainly lower the financial burden. tom.com, however, will acquire 50% of Yazhou Zhoukan from Ming Pao, a newspaper and magazine publisher, for HK$60 million pure cash.
Hoping to narrow its losses, tom has been actively diversifying into other media businesses, but tom's preference to pay cash time rather than consideration shares is a bit of an enigma. According to CEO Mr. Sing Wang, tom had over HK$900 million cash and the current share price was too low, so they would prefer to use cash instead of shares for acquisitions.
Different investors may have different views on tom's share price. Compared to a 52-week high of $15.35, its share price has declined to the current level of $2.1. As a result, the current price may appear near the bottom but ING Barings has a different view about this. ING downgraded tom.com to sell with a target price of $1 in December 2000.
"Given the uncertainty in the company's business model in generating positive earnings, we expect the stock to continue to underperform the market," the ING report said. "The portal's recent acquisitions such as shawei.com and 163.net, financed via its shares, also resulted in a greater dilution for its existing shareholders."
The synergies generated from bundling these businesses may not offset the costs of integrating these business lines and may result in tom.com's costs increasing at a faster pace than its top-line growth. Compared to its losses, we believe that the $900 million cash cannot be considered significant. Despite smaller third quarter losses, tom is expected to report a loss of around HK$430 million for the full year FY2000. If this is true, the company can survive for 2 years without any more external financing.
According to Ming Pao's interim report, Yazhou Zhoukan recorded an encouraging 20% increase in its advertising revenue. Together with savings in its operating costs, it reported a reasonable profit margin and made a positive contribution for Ming Pao during the six months ended 30 September, 2000. Based on the unaudited consolidated accounts of Yazhou Zhoukan up to 19 February, 2001, the unaudited consolidated capital deficit of Yazhou Zhoukan as at 19 February, 2001 was $8.03 million. We don't know whether 50% of Yazhou Zhoukan is worth $60 million, but at least Yazhou Zhoukan was profitable with a "reasonable" profit margin, compared to an unreachable profit from its own portal business.
As at 30 September, 2000, Ming Pao had cash and bank balances of $305.1 million. Couple with the proceeds from the disposal of Yazhou Zhoukan, the company will have $365.1 million cash, or 93 cents per share. At $2 per share and with 392 million shares outstanding, Ming Pao is capitalized at HK$784.5 million.
At $2.1 per share, tom.com is capitalized at $6,634.7 million. With a target price of $1, tom would still have a market cap of $3,159.4 million -- 4 times the profitable Ming Pao. It is quite difficult to say whether using cash for acquisitions is beneficial for shareholders. On one hand, issuing new shares may have huge dilutive effects; on the other hand, using cash will not only increase the financial pressure but will also lower its interest income, a major profit contributor.
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