its CDC Software subsidiary. Most agree that makes sense. In 2005, the
CDC Software subsidiary generated about 80 percent of the total earnings
for the entire enterprise. CDC's mobile gaming, advertising, and portal
operations staggered along with minimal growth. Splitting the company
would be good for all of its disparate parts' long-term prospects.
Before its name change from Chinadotcom to CDC Corporation, the company
was focused on being an Internet portal. By successfully capitalizing on
its URL name, China.com, and riding the Internet wave of the late 1990s,
the company completed an IPO on the Nasdaq in 1999 that raised US$86
million. Not satisfied, the company went back to the equity markets the
following year and raised an additional $304 million in 2000. For the
coup de grace, the company then turned to Hong Kong investors on the
Growth Enterprise Market in Hong Kong, and raised $169 million.
Since 1999, CDC has gone from being the darling of the global digerati
to being the ugly step-child propping up the online dreams of a fading
management team. It has seen its acquisitions evaporate. Portals like
Sohu.com, Sina.com, and Netease.com tower over it, a company who still
says that the "China" part of its name is its biggest draw. Perhaps it
once awed English-speaking foreigner investors, but not the Chinese
users who call their country "Zhongguo".
Model business
So the split might be a good thing. In my view of the world, a
corporation can get away with owning so many different businesses only
under two strategic scenarios:
Berkshire Hathaway Strategy: This is where Warren Buffett chooses
companies that have such great management, great track records, and
great profits that he considers them all "Rembrandts". He just buys a
company, doesn't mess with it, keeps existing management, and milks the
cash.
GE Strategy: This is where GE has such a strong management
infrastructure, sound systems integration ability, keen financial
reporting and talented managers that it can integrate varying types of
businesses and has a proven record of creating shareholder value by
doing so.
If you are not utilizing the above two strategies then you better stick
to buying companies that are basically the same as your existing
business, otherwise there will be bad times ahead. CDC is not following
either of the above two scenarios.
Remember: if you are running a public company, diversification is not
your job. It's the shareholders' job. If a shareholder buys into a
portal company, but then decides he wants a business software company to
diversify his portfolio, it's the shareholder's job to then buy into a
business software company. It is not the portal company's job to buy a
business software company.
Acquiring targets
But even as separate units, will CDC Corporation's businesses survive?
The software side of the business should do well. Ross and Pivotal, two
recent acquisitions, can anchor the business as CDC acquires smaller
businesses. Though the company seems eager to buy companies that create
software, it might be a good idea to also go after some of the resellers
who already have many long-term clients. We will see smaller CRM, email
management, and business automation companies snapped up by CDC. Its
recent bid for CRM provider, Onyx, has gone up in smoke with CDC
withdrawing its hostile acquisition attempt after Onyx had already
rejected its initial proposal.
But what about the old China.com side of the business? I fear that side
of the business is always going to hobble along. It's a division that
has no focus.
If anything, China.com should focus purely on the external China market.
They have a good domain name that foreigners will recognize. They will
never be a top site for Chinese, so they should focus on the millions of
foreign eyeballs that are looking and visiting China. In the minds of
investors it might not be so sexy for a Chinese website to target
foreigners, but there's lots of money to be made.
Either they focus on Chinese, or they focus on foreigners with their
domain name, but past business models show that targeting both does not
work. They are trying to make a square peg fit into a round hole.
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be
reached by visiting www.chinatechnews.com