Can Asia's Cyber Kid Rise Again? The son of Hong Kong's richest tycoon had a bad year. His Internet company lost $28 billion in market value. But Richard Li is still unbowed.
Louis Kraar
Though his stock has tumbled, Richard Li says, "I'm fine. Already, I'm so much luckier than everyone else." COLOR CHART: FORTUNE CHART Pacific Center CyberWorks weekly stock price COLOR PHOTO: GREG GIRARD--CONTACT Li Ka Shing (seated) with sons Richard (left) and Victor COLOR PHOTO: PHOTOGRAPH BY PAUL HU--ASSIGNMENT ASIA
03/19/2001 Fortune Magazine
On a breezy Sunday, Richard Li, 34, the second son of Hong Kong tycoon Li Ka Shing, dashes into the Royal Hong Kong Yacht Club. All eyes follow young Li to a secluded table on the terrace, where you can hear water lapping on the shore and see the city's spectacular skyline. Li plainly enjoys being the center of attention. In fact, he seems unfazed that his company's stock has tanked and that he has yet to prove he can deliver on his vision of becoming Asia's new king of broadband. Speaking in his own version of a patrician British accent, he says, "I'm fine. Already, I'm so much luckier than everyone else."
But luck cannot rescue Li from the tightest spot of his charmed life. In the summer of 1999, Li launched Pacific Century CyberWorks to create, as he boldly put it, "the world's largest broadband Internet business." An adroit salesman of concepts, Li attracted $50 million in seed money from Intel, then raised nearly $2.4 billion on a buoyant Hong Kong stock market in less than a year. On Aug. 17, 2000, Li reached what he calls "the highest point of my life." His infant company closed a $28 billion deal to acquire HKT, the dominant telecom provider in Hong Kong, from Cable & Wireless of Britain. Lehman Brothers hailed Li's merged corporation as "Asia's new-media powerhouse." And his 72-year-old father, Li Ka Shing, who is not directly involved in the business, told friends that his younger son was "like a golfer who shoots a hole in one for 18 straight holes."
Since then, the global selloff of tech stocks has made Richard Li's life more like a string of triple bogies. Over the past six months PCCW's stock has dropped some 70%--from $1.97 to 58 cents per share--wiping out almost $28 billion in market capitalization. It was the worst performer on the Hong Kong index last year. As a result, Li's shareholders are angry, and the once-adoring local press derides him with epithets like "poor little Richard."
What happened? It seems some investors got caught up in the Li family aura. Richard Li desperately wants to prove himself as smart as his father, who happens to be Hong Kong's most successful entrepreneur. Although the son strongly professes to be on his own, it's hard to imagine that investors weren't in part betting on PCCW because they assumed Daddy was in the background. Explains Matei Mihalca, the Asia-Pacific Internet analyst for Merrill Lynch: "The combination of the Li family's reputation and the Internet seemed a great opportunity for value creation."
Li professed to have a killer application for high-speed Internet users. What he grandly calls Network of the World (NOW) aims to beam via satellite original content that melds the experiences of viewing television and surfing the Web. The international service started broadcasting from London last summer, over the Internet and to a Hong Kong cable outlet, with such English-language content as celebrity trivia and music videos. It flopped.
Li also billed PCCW, which made a slew of investments in other infotech firms, as "a chance to participate in growth of the Internet without the risk." The value of PCCW's portfolio, acquired for $900 million, has shrunk significantly--though the company won't disclose the figures until the end of March.
Where does that leave Li? Amazingly, still supremely self- confident; he says that he "caught a safety net" by acquiring HKT, with its steady cash flow. He maintains that only one other Internet company, AOL (which took over Time Warner, FORTUNE's parent), "managed to merge into a real business in such a short period." Trading what in retrospect was clearly an inflated stock for a hard asset makes good strategic sense. But Li also borrowed $12 billion-- the largest syndicated loan ever in Asia--to do it. Trouble is, he must start repaying the principal in three years. So he has been selling off choice assets and curbing investment in his Internet dreams. "I must add value to HKT," he says, "or I'm going to have a credibility problem."
He's right. Li must energize a former telephone monopoly that faces fierce competition. He aims to do that by diversifying-- running e-commerce sites for corporate customers, creating an Internet portal for users of cell phones, and breaking into the telecom market on mainland China. He must also somehow turn around HKT's money-losing interactive TV service.
Finding the money to do all this is his biggest challenge. Li has already managed to knock down PCCW's total debt from $12 billion to $4.7 billion. He raised more than $3 billion, for example, by forming an alliance with Telstra, an Australian telecom company.
Still, HKT's earnings are eroding. Its profits fell 90%, to about $146 million, on revenues of $3.6 billion, for the fiscal year that ended in March 2000, and analysts expect the merged company--PCCW-- to lose money this year. Li is counting on a single cash cow, the HKT division that provides fixed-line services to most homes and offices in Hong Kong, to generate $1.2 billion of cash flow annually. That business alone, he says, can service $350 million of interest payments and provide $300 million of capital a year to back new growth activities like Internet services.
Is Li up to the task? Although he's a bright and nimble dealmaker, there is little in his past to suggest he has the operating experience needed to pull off the job.
Growing up has been difficult for Li. "He has never been a typical obedient Chinese son," recalls Marjorie Yang, 48, chairman of the Esquel Group, a clothing manufacturer, and one of Li's closest friends. "Even at a young age he had the guts to argue with his father."
As a teenager, Li went off to the U.S. and lived by himself. He attended the private Menlo School in Menlo Park, Calif., and stayed alone in an apartment across the street because the school had no boarding facilities. The dean took him under his wing, encouraging Li to improve his English. At Stanford, where he majored in computer science, Li had a good time. "College was a ball," he says.
In 1987 his father pushed Li into joining Gordon Capital, a small investment bank in Toronto in which the elder Li owned a stake. Richard Li quickly learned and loved financial trading. He acquired Canadian citizenship and, at 23, became the youngest partner of a Toronto investment bank. In 1989 he was summoned back to Hong Kong to work for Hutchison Whampoa, his father's company.
At first Li acted like a spoiled kid, walking out of meetings that bored him, but he shaped up after being assigned to develop Asia's first satellite television service in 1991. As the hard-driving boss of Star TV, he made a name for himself by bringing American soap operas and music videos to 53 million homes from Seoul to Dubai. Star never made any money, and after two years the elder Li threatened to shut it down. Instead, in what is still the deal of his life, Richard Li sold Star to Rupert Murdoch's News Corp. for $950 million--a profit of about $800 million. Says one former Hutchison senior executive: "Richard convinced Murdoch that Star TV could get accepted in the China market, but it never did." Star TV still operates in the red.
In his mind, the Star deal won Richard Li his independence. As he puts it, "Without that milestone, I don't think that I could have raised money for Pacific Century and been on my own." His father, who owned half of Star (Hutchison held the other half), gave his $400 million share of the profits to Richard. In 1993 the younger Li established his private Pacific Century Group and promised to bring to Asian consumers "the best of Western technologies."
Then he spent five years shopping around for the next new thing-- starting a satellite-based phone service for companies in Asia, developing property in China, negotiating to buy a pilot-training company in the U.S. "At the time we were just chicken," Li admits. "We missed the first three years of the Internet."
The origins of PCCW go back to March 1999, when Li found a sweet deal right in Hong Kong. The government handed the young scion a valuable franchise to develop a 64-acre infotech campus called Cyberport. Outraged at the lack of competitive bidding, ten property barons in Hong Kong and the local press protested the contract. Li gets the land free from the government; in return, he shoulders over $1 billion in construction costs (readily financed by banks), then shares the profits. Some three-quarters of the Cyberport area will be housing, a traditional source of riches in Hong Kong. Li, who promoted the project as a way to attract technology companies, has already signed up such prospective tenants as Cisco, Oracle, and Microsoft. Says Sin Chung-Kai, a member of the Hong Kong legislature: "The government, in effect, declared that Richard Li is our king of the Internet."
Amid a buying frenzy for tech stocks in the U.S., Li put together the first real Internet play in Hong Kong. He took over a small public company that distributed telecom equipment, threw in a few assets like the Cyberport, and relaunched it as PCCW in August 1999. As with many an Internet startup in those days, the stock took off on a wave of hype and hope (see chart).
Li's ambition is to build a major international corporation by the age of 40--just six years from now--and he chose infotech as the growth industry to get him there. Says Peter Allen, who has known Li for eight years and is now CFO of Pacific Century Group: "He is without doubt the most driven person I have ever met." He's also a demanding CEO, who told one manager, "I don't want to listen for two hours to why everything is so difficult."
For all his independent spirit, Li greatly benefits from simply belonging to an illustrious family. Li Ka Shing controls four public companies, including the Hutchison conglomerate, which together represent about 15% of the stock market capitalization in Hong Kong. Those businesses flourish on a network of personal contacts and an aura of respect that the elder Li has cultivated for a lifetime--and wants to pass on to a pair of sons: Richard and Victor, 36, the heir apparent to run the family holdings. Richard, who has often clashed with his father, last year resigned as deputy chairman of Hutchison.
As a son of Hong Kong's richest man, Richard Li has ready access to creditors, business partners, and the top leaders of China--whose telecom market he longs to crack. The Li name can work almost magical effects on stock markets. In mid-January, PCCW's sagging shares rose 8.8% the day after local reporters spotted father and son lunching in a public dining room of the Shangri-La hotel in Hong Kong.
Many investors assume that the patriarch will help. The elder Li has said that "family members care about and help each other." But a visible bailout by the father could shatter the son's pride: "I do not want to get somewhere," he says, "because of who I happened to be born to."
Li has done pretty well for himself (if not for his shareholders), even for a guy who started with $400 million, courtesy of Dad. He now owns 30% of PCCW, a stake still worth close to $4 billion. His other big asset is 60% of Pacific Century Place, a $1 billion office building under construction in Tokyo; Hutchison owns the rest. And he has many of the toys that young tycoons like to collect--including the first electric car in town, a six-berth yacht, a small plane, and a nearly completed seaside mansion in Hong Kong, which he insists will be used, for now anyway, only for entertaining corporate guests.
In many ways, Li keeps reinventing himself. His wood-paneled private dining room is decorated with framed photos of himself with such political leaders as China's President Jiang Zemin, Singapore's Lee Kuan Yew, and Britain's Margaret Thatcher. The visual message is that he has superb contacts. Li boosts his image by appearing on panels at the World Economic Forum in Davos, Switzerland, as he did in January, alongside such luminaries as Microsoft's Bill Gates and Sony's Nobuyuki Idei. This is not by chance: Four PCCW vice presidents spend their days burnishing his corporate and personal image. Last year Li shed conservative business suits for the casual attire of Silicon Valley and began carrying his business papers in a backpack. Publicly he can display a boyish charm. Putting on a tie and jacket in his car before a speech, he remarks, "I have to dress like an adult today."
When PCCW was launched, Li painted an exciting picture. He promised to deliver original programming via satellite to cable TV operators in such places as China and India. A demonstration tape of Li's plan for convergence of TV and the Internet converted many securities analysts into cheerleaders. In essence, viewers could watch streaming video on their computers while simultaneously surfing the Internet. Assessing that nascent business, HSBC Securities last year predicted that Li's company would capture 21% of the global TV market by 2005. That forecast today reads like bad science fiction.
In the real world, Li lost no time in searching for a merger partner to support his highflying stock. Above all, he wanted to find a company with both dependable cash flow and expertise that could enhance PCCW's activities. In September 1999, aboard his yacht in southern Thailand, he kicked around the idea of a merger with David Wetherell, the chairman of CMGI. They swapped stock valued at $350 million on each side, but Li found no haven in CMGI, essentially an American holding company for Internet stocks. Plans for the two companies to set up a joint investment fund never materialized. By then, says Li, there weren't enough Internet companies worth buying. Having watched his would-be partner become a casualty of the tech wreck on Nasdaq last year, Li concludes that CMGI "has a flawed business model."
Early last year Li wanted to acquire EMI, the British music group that eventually went to Bertelsmann of Germany. He saw EMI as both a cash machine and a creator of unique content for his Internet service, but his senior executives worried they did not have the know- how to run a music company. Instead they persuaded Li to go after HKT. Says a PCCW insider who recently left the company: "The idea appealed to Richard's ego. Here was a chance to show that he could do something really big without his father's help." Li, in fact, waited until the official announcement of PCCW's bid for HKT was rolling through his fax machine in February last year before informing his dad. "My father hit the roof about not knowing," says Li, who insists he was simply following stock exchange rules.
Li has made his name making deals rather than operating a company. Now, as executive chairman and de facto CEO, he must manage a large enterprise (with 14,000 employees) for the first time. "I've grown up enough," he says, "to learn that I can't know every detail of our operations." Even so, he is notorious for peppering managers with questions and demands. Most subordinates jump every time Li gets on the intercom, which they privately call the "bark box." Remarks Jeffrey A. Bowden, 54, a veteran of the American telecom industry and PCCW's executive vice president for strategic integration: "Richard is relentless, and he expects the same from people who work for him."
While grappling with operating problems, Li also must contend with a troublesome investor. Cable & Wireless expected to get $15.7 billion (in cash and stock) for its majority stake in HKT but wound up holding 20% of PCCW's shares and losing about one-third of its expected take. The terms of the deal allowed C&W to sell about 5% of PCCW last September, then unload the rest this year. That overhang is helping depress the share price. But Li himself has done damage to PCCW's stock price. In August he sold shares equivalent to 1% of the company, pocketing nearly $500 million on an average price of about $2 a share. His selloff just before the merger closed sent a bearish chill through the market; PCCW has declined since. Li says he needed the money to pay off debts for his privately held Tokyo office- building project. In November, after PCCW shares had dropped to around 70 cents, Li invested $815 million in the company. Now he's searching for an investor (perhaps his dad) for C&W's remaining shares, worth a little less than $2 billion.
Clearly Li has a lot of work to do. But at least he survived the Internet stock debacle and has a stable base--a cash-generating phone company--on which to build. Says one of his senior associates at PCCW: "Richard needs to put his ego on ice and concentrate for three years on solid performance of this company." Taking that advice could turn his Internet ambitions into a decent business.
FEEDBACK: lkraar@fortunemail.com
[BOX]
PCCW's Roller-Coaster Ride 1999 August Richard Li launches PCCW. 2000 Jan. 25 PCCW announces alliance with CMGI. Feb. 11 PCCW makes $28 billion bid for Hong Kong Telecom. Feb. 29 Cable & Wireless in London accepts PCCW offer for HKT. March Dot-com bubble begins to burst. Aug. 8 Li sells personal shares equal to 1% of PCCW. Aug. 17 PCCW officially merges with HKT. Sept. 7 CMGI and PCCW alliance fails to materialize. Sept. 20 Britain's Cable & Wireless unloads 5% of PCCW for $1.43 billion. Nov. 29 Li invests $815 million of his own money in PCCW. 2001 Feb. 2 PCCW's Network of the World announces layoffs.
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