HONG KONG (Reuters Breakingviews) - Zhou Hongyi may have pulled off one of history’s great trades. The Chinese executive led a $9.3 billion management buyout of New York-listed antivirus company Qihoo 360 in 2016. Now its successor, 360 Security Technology, is trading in Shanghai at a $56 billion market capitalisation. That value difference far outstrips what most hedge funds or commodity traders achieve in years of arbitraging price anomalies.
This was a complex deal, with elaborate financing, a large consortium of investors, and an agonising wait as Chinese regulators temporarily suspended backdoor listings, a shortcut to list in which a company floats by merging with a listed shell. But it was more than worth the wait.
The U.S.-listed Qihoo was trading at 14 times forward earnings when Zhou made his bid in mid-2015. The Chinese group now fetches about 122 times, based on forecast 2018 earnings of 2.9 billion yuan. That supports the idea behind a raft of recent buyouts: that foreign investors seriously under-appreciated many Chinese companies.
Zhou’s direct and indirect stakes, totalling about 23 percent, mean he is worth roughly $13 billion. To make an arbitrary comparison, contrast that with Glencore boss Ivan Glasenberg, probably the world’s most famous commodity trader, who is worth about $6.7 billion according to Forbes.
There are several caveats. First, it is not yet clear what a sustainable value for 360 Security would be. Chinese investors pushed the shell company’s shares up more than 500 percent before the deal completed, meaning the price of the newly enlarged group might be overstated.
Second, Zhou swapped hard-currency assets for yuan, which is not an exchange everyone would make. And third, this was not just about his risk-taking: he benefited from a huge run-up in the value of technology firms everywhere.
Alas for would-be copycats, this will be hard to follow. Some other firms are still in limbo, awaiting the green light to go public. Others have failed even to close U.S. takeovers. Chinese regulators recently warned they would only approve backdoor listings from high-tech companies if they support “national industrial strategies”. 360 Security’s software fits the bill. Other applicants may find it harder.
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