dave liu dot com

Below is an article that was published in the Boston Globe.  I was interviewed for my views on the domain name sector.

Profits hefty in Web addresses

By Carolyn Y. Johnson, Globe Staff | July 30, 2007

The Web addresses that businesses and people online call home have spawned the equivalent of a real estate boom in the real world with speculators, appraisers, developers, investors, and brokers turning the names typed on navigation bars into hefty profits.

“It is a global, multibillion-dollar industry,” said Peter Lamson, senior vice president and general manager of Waltham-based NameMedia Inc.’s domain name marketplace. “Customers need to find your doorstep. A brick-and-mortar business needs an attractive address, and it’s no different online.”

In the 1990s, speculators registered Internet domain names on the cheap, often hoping to make a lucrative flip selling them to someone else. When the tech bubble burst, many were left with little more than words.

But as money has flooded into Web-based businesses such as MySpace and YouTube and online advertising has grown explosively - rising by nearly a third each year for the past three years - domain names have become a hot investment.

Some industry watchers said that the market could prove volatile over time, and there’s always the potential that a speculator will be left with nothing more than a string of words.

“There’s value there - a few of these companies think they’re worth half a billion because they’ve got all this waterfront property,” said Todd Dagres, general partner and cofounder of Spark Capital, a firm that invests mainly in media, technology, and entertainment businesses. “Right now, the stock’s rising because we’re in a fairly frothy market.”

Backed by venture capital firms Highland Capital and Summit Partners, NameMedia has raised more than $100 million in debt, according to a New York Times story, with the help of Goldman Sachs and owns 750,000 domain names as well as marketplaces where people can buy or sell names. This outfit of “cyber real estate tycoons,” as president Jeffrey Bennett calls it, is just one of three local firms that are playing a leading role in the rush for prime virtual space.

Internet Real Estate Group LLC, with offices amid the boutiques of Newbury Street, takes a luxury developer’s approach to the domain names game. The company turns a select number of “premium” domains - site names that are instantly recognizable, such as jeans.com, chocolate.com, or software.com, into full-fledged Internet businesses with content, ads, and products for sale. Taking another tack, Sedo.com LLC, a German company with US headquarters in Kendall Square, handles more than $3 million of transactions every month, acting as a kind of eBay for domain names.

DN Journal, an online publication that follows the industry, has tracked five sales this year that topped $1 million each– including Porn.com and Seniors.com — and 50 for $100,000 or more as of July 22.

“We’re about three years into a major upturn,” said Ron Jackson, editor of DN Journal. “A ton of ad revenue started flowing from traditional media models onto the Web and it’s been unbroken upward momentum.”

While people frequently navigate the net by punching keywords into search engines, an estimated 10 percent of searches occur when people type keywords directly into their address bar. That means a website with a common name, such as WiFi.com, already generates a certain amount of natural traffic, and people who buy a portfolio of names could earn a dividend on their investment just by putting ads up, according to Jeremiah Johnston, chief operating officer at Sedo.com.

Think of domain names “as analogous to buying spectrum in the wireless world or channels on television or buying real estate,” said David Liu, managing director of Jefferies Broadview in Silicon Valley.

Mike “Zappy” Zapolin and Andrew Miller, founders of Internet Real Estate Group, got into the domain business in 1998, buying beer.com for $80,000 from a young man in Colorado, who they said used the website to post photos of inebriated people vomiting. The owner, hoping to buy more beer, posted a banner asking for advertising.

They sold beer.com four months later for $7 million. Now, they believe the businesses they are building will ultimately be worth hundreds of millions.

“In real estate, if you built a building and were offered three times what you paid for it in a week, you’d be thrilled,” Zapolin said.

“A piece of virtual real estate, on the other hand, may cost a thousand or a million, but bring in 50 times greater return. “It’s like buying Madison Avenue 110 years ago.”

Acting as a broker, Sedo takes a different approach from Internet Real Estate Group and NameMedia - listing, but not owning 8 million domain names, and taking a 10 percent commission on each sale.

The company also provides services to help people put content on their domains, so they can earn some revenue when people stumble on the sites and click on ads. Recently, Sedo managed the sale of Vodka.com for $3 million and Chinese.com for $1.1 million.

“We were being told when the company was founded that it was the worst possible timing,” Johnston said. “It turned out to be excellent.”

Lots of people have asked me what is one of the best Asian movies I have seen recently?  I’m not sure its the best but a Korean thriller called Old Boy definitely ranks near the top.  Below is a trailer.  Enjoy!

I recently had the opportunity to attend the Milken Institute Global Conference in Los Angeles.  If you ever have an opportunity to attend, I highly recommend it.  My company has been a sponsor of this conference, and many others, over the years and I can say this is truly one of the most unique conferences today.

More than 3,000 of the world’s leading decision-makers gather in Los Angeles to attend over 120 sessions that examine challenging global issues from reducing our dependence on oil to ensuring that people everywhere have access to a good education, quality health care and well-paying jobs.

Some of the highlights of the conference included director Sydney Pollack interviewing architect Frank Gehry, a look at public-figure philanthropy with Andre Agassi, Michael J. Fox and Ted Turner, and a session on the politics of climate change with Sen. John Kerry and other experts.

I didn’t have a lot of time at the conference but I did manage to attend a very good luncheon hosted by financier Mike Milken, an interview with actor Kirk Douglas, a breakfast by publisher Steve Forbes, and a luncheon hosted by Maria Bartiromo of CNBC fame.

Nobel Laureates in Economics Address “The Future of Capitalism”

This luncheon was moderated by Michael Milken and included three Nobel Laureates (Kenneth Arrow, Gary Becker, Myron Scholes).  He posed an expansive question for them: What is the future of global capitalism? The result was a wide-ranging, big-picture discussion of the role capitalism has played in increasing society’s welfare, and whether this development is likely to continue.  Overall, the panelists were quite positive and there were some interesting charts regarding the positives and negatives and the role technology has played in our population development.

A Conversation With Kirk Douglas

I have always been a huge fan of Kirk Douglas movies (and his son) and so it was really interesting to attend this interview hosted by Mort Zuckerman, Chairman and Editor-in-Chief of U.S. News & World Report.  Kirk has appeared in more than 70 films over six decades in Hollywood.

At 90 years old, Kirk discussed his latest autobiographical book titled ”Let’s Face It”.  He has had a stroke so his speech was a little slurred but he was very understandable.  He spoke at length about the need for peace in the world for our children’s sake, the suicide of his youngest son, the great achievements of his son Michael Douglas, and his views regarding racism in the USA.  One of the final questions/comments came from the mother of Joachim and River Phoenix who shared her similar experiences raising her sons.

U.S. Overview: Not Too Hot, Not Too Cold?

This panel was moderated by Steve Forbes, President and CEO of Forbes Inc., and included Brian Fabbri (Chief U.S. Economist for North America, BNP Paribas), Angelo Mozilo (Chairman and CEO, Countrywide Financial Corporation), Peter Orszag (Director, Congressional Budget Office) and Andrew Rosenfield (Managing Partner, Guggenheim Partners). 

The panel revolved around questions regarding whether the U.S. is poised for a return of the “Goldilocks economy” similar to 1995-96 - not too strong to cause inflation yet not too weak to slip into recession? (In other words, just right.) 

2007: The Year of Private Equity?

This panel had a lot of glitz but not a lot of substance or meaningful takeaways.  The panel was moderated by Maria Bartiromo, Managing Editor and Anchor of ”The Wall Street Journal Report” for CNBC.  On the panel were CEOs of some of the top private equity firms in the U.S. including Leon Black (Founding Partner, Apollo Advisors LP), David Bonderman (Principal and Founding Partner, Texas Pacific Group), Thomas Lee (President and CEO, Thomas H. Lee Capital LLC) and David Rubenstein (Managing Director, The Carlyle Group).

These firms have bought some of the most recognized public companies in America: Reader’s Digest, Dunkin’ Donuts, Toys-R-Us, Neiman Marcus and Metro-Goldwyn-Mayer. These private-equity firms have changed their image and are now viewed by many as financial saviors, paying good money for underperforming companies and turning them around. And they are averaging 13 percent returns in the past two decades, which is good for institutional investors. Of course, not everyone views them so positively. Flush with money, and running short on targets, these investors have become more aggressive in their search for firms to buy, which has raised concerns with regulatory agencies both within and outside the U.S.

Below is a follow up to an interview I gave to the folks at The Dealmaker.

Digital Media of the Future

It’s 2010 in the United States. Tell us what the digital media landscape looks like.

Let me describe it by giving an example of how I envision I will be consuming digital media in 4 years: I live in my fully networked house where I have a server that acts as a central nervous system and stores or accesses all of my digital media and controls everything in my house according to my personal preferences. My server stores or caches all of the digital media I have ever consumed and anticipates what I would like to consume so that upon request I can view it at my leisure - not at the leisure of my wireless data connection. Content I consume can loosely be categorized into proprietary (created by me), sponsored (created by corporations) and user generated (created by individuals). Obviously all of my proprietary content is secure and is largely hosted locally. Access to my digital locker is conducted verbally - not through a cumbersome text method - and my server automatically makes recommendations based on my profile and historical habits. Today my server recommends Spider-Man 5 because it knows I have watched the previous four and accessed a few blogs that critiqued the prior movies. As I move from room to room, the movie is automatically displayed in each room’s flat panel until I go outdoors. At that point its streamed to my handheld pocket computer. I decide to switch to pay mode to eliminate all the ads that are embedded in the movie.

Although all content is free and ad supported in 2010, I detest the branded shoes Peter Parker wears because I just learned through my custom news feed that they have a sweat shop in China.

I think you get the idea. I think all digital media companies are ultimately driven to provide content or applications Any Time, Any Where, Any Device. Obviously in 2010 we’ll be a lot closer to this reality than where we are today.

Where do you see growth happening in the next 6 months? 12 months? 18 months?

I think growth over the next 6 months will likely come from many of the same areas your readers have already been tracking: video/rich media, user-generated sites, and mobile applications. However, as we head into the next 2 years, I think we’ll really see a rapid acceleration of applications optimized for an always connected world. We may finally see the promise of convergence between the TV and PC fulfilled although I’m betting it may actually occur first with mobile devices.

Finally, we should not underestimate the impact China, India and Russia will have on all things digital media related. The Internet has no borders so I wouldn’t be surprised if we start to see more US companies benefiting from growth over there. The best is yet to come so stay tuned.

Below is a transcript of an interview I gave to the folks at The Dealmaker.  Enjoy!

Taxicab Interview with David Liu

Everyone is saying that it’s all about digital media, the valley is hot again, etc. What’s your take on the resurgence of the valley and the state of affairs in the digital media sector?

From my vantage point as an investment banker, it certainly appears that the Bulls are running wild and the Bears are in hibernation in the Valley! In 2004 and 2005, VC fundings were happening but it certainly feels like the pace of investment is accelerating. Since the beginning of this year, we’ve tracked and noticed at least 1 VC funding occurring daily in the digital media sector and most of those deals are occurring in Silicon Valley. So, the obvious question is why is this happening? I believe its due to a confluence of several key trends:

“Capital Anyone?”

Despite a whittling of the VC community since 2001, there has been a substantial amount of capital raising particularly among the veteran firms. Improvements in the economy have also led to the reemergence of the angel investor. Thus, its become relatively easy for companies to get start-up capital - particularly in digital media which is generally a low-capital intensity sector. Once a company has been created, there is also plenty of mid/late stage capital available from growth, private equity and hedge funds - all of whom have shown a strong penchant for tech investing. Why? Because globally, we’re experiencing a glut of capital and Silicon Valley is a key recipient of this mega trend.

“Exits Are Coming!”

There is also light at the end of the tunnel. Although the digital media IPO market has been relatively stagnant (fewer than a dozen since 2005), robust M&A activity due in part to the resurgence of interest from traditional media companies like News Corp and Viacom has created an optimism I haven’t seen since 2000. In addition, we’re all acutely aware of the Battle Royale occurring among the “5 Horsemen of the Internet” (Google, Yahoo, Microsoft, AOL, eBay). In their apocalyptic battle for Internet supremacy, there will be a lot of companies that will shift the balance of power and its ever entrepreneurs hope to be the pebble that helped David slay Goliath. Silicon Valley-types are naturally optimistic and the environment gives us hope that sweat and cash equity will be monetized one day. If investors know they can get out, they’re more likely to invest.

“Build It and They Will Come”

I think one of the most favorable trends has been the rapid build-out of customer touch points for digital media companies. With near ubiquitous PC usage, accelerating broadband penetration, and proliferation of wireless phones and slim devices, digital media companies with good applications or content can reach customers much more cost effectively than before. Technologies such as search, RSS, and social networking applications now permit many companies to build strong organic customer bases which they can then monetize through paid search or Web service business models. The bottom line? Companies can get to cash flow sustainability relatively quickly if they were meant to be.

“So What’s the Catch?”

I think its always important to remember that with the brief exception of the dotcom Y2K era, most technology companies need at least 6-7 years from founding to reach IPO or M&A “escape velocity”. As such, I’m optimistic about those digital media companies that were founded 4-5 years ago, reached cash flow break-even due to the paucity of VC funding, and are now solid businesses with a bright future. However, for those being companies started today, I counsel them to have a 7-Year Plan. The economy is already showing signs of slowing down and digital media companies tend to be higher beta because of their ease of duplication and the inherently low switching costs of the Web customer. Overall, I’m cautiously optimistic but speed is even more critical now than ever before. This may truly be the era where Fast Follower beats the First Mover every time.

You have just been given $7 million in seed to start a digital media company ? What type of company do you start and why?Before I answer that, let me explain a couple of my own observations. I’ve often noticed that small differences in the user experience of a digital media offering can literally determine success or failure. Offerings could be almost identical on paper but little differences allow one business to accelerate while another stagnates. I wish I could tell you I’m smart enough to know the secret formula but I don’t. As such, I’m loathe to put all of my eggs in one basket.

In addition, I cover Chinese Digital Media companies so I also have first hand knowledge of the current state of software expertise in emerging countries such as China. Certainly for very advanced infrastructure software projects, the talent does not yet exist. However, with the proliferation of open source, object oriented languages, and SOA, the knowledge does exist in China and India to build Web service based business models - particularly those targeted to a consumer audience. The engineering cost is much lower than in the US and thus any business I start would utilize programmers over there.

Finally, as I mentioned before, I’m a big believer in being a Fast Follower rather than First Mover. Google, MySpace, FaceBook, etc. were not the first to create the category in which they currently dominate.

So, if you gave me $7MM I would actually start 5 companies each funded with $1 million. That would buy a lot of programming capability in China and India. The areas I’d choose would be those where I’ve already seen some well publicized traction such as video ad networks, advergaming, online games, etc. I may even fund vertical search companies but I’d be wise to stay away from natural language text-based search.

If all else fails, I’d use the remaining $2MM and fund one of my successful entrepreneur friends and let them start anything they want. Business school taught us its always better to banks an A+ team with a B+ idea than the other way round. Given the low barriers to entry, I believe this is even more pronounced in digital media.

Before I answer that, let me explain a couple of my own observations. I’ve often noticed that small differences in the user experience of a digital media offering can literally determine success or failure. Offerings could be almost identical on paper but little differences allow one business to accelerate while another stagnates. I wish I could tell you I’m smart enough to know the secret formula but I don’t. As such, I’m loathe to put all of my eggs in one basket.In addition, I cover Chinese Digital Media companies so I also have first hand knowledge of the current state of software expertise in emerging countries such as China. Certainly for very advanced infrastructure software projects, the talent does not yet exist. However, with the proliferation of open source, object oriented languages, and SOA, the knowledge does exist in China and India to build Web service based business models - particularly those targeted to a consumer audience. The engineering cost is much lower than in the US and thus any business I start would utilize programmers over there.

Finally, as I mentioned before, I’m a big believer in being a Fast Follower rather than First Mover. Google, MySpace, FaceBook, etc. were not the first to create the category in which they currently dominate.So, if you gave me $7MM I would actually start 5 companies each funded with $1 million. That would buy a lot of programming capability in China and India. The areas I’d choose would be those where I’ve already seen some well publicized traction such as video ad networks, advergaming, online games, etc. I may even fund vertical search companies but I’d be wise to stay away from natural language text-based search.If all else fails, I’d use the remaining $2MM and fund one of my successful entrepreneur friends and let them start anything they want. Business school taught us its always better to banks an A+ team with a B+ idea than the other way round. Given the low barriers to entry, I believe this is even more pronounced in digital media.

I was interviewed for the following article which was written by Steve Rosenbush and published by Business Week on August 11, 2005.

Investors hope it’ll be another Google, says China tech banking expert David Liu. But he warns that it’s “hard to pick winners in tech” The initial public offering of Baidu (BIDU ), the Chinese Internet search company, shattered records on Aug. 4. It was the most successful Nasdaq IPO in five years, rising from $27 to $154. While the stock price has settled back at $91, the company has recast the perception of the Chinese Internet market. Valuations of Internet companies, and search companies in particular, are on the rise.

Now, big players from the U.S. are pouring into the Chinese market. Google (GOOG ) has a stake in Baidu. Yahoo! (YHOO ) is said to be in talks with e-commerce site Alibaba, eBay (EBAY ) has acquired Eachnet, and MSN has its own operations in China (see BW Online, 8/11/05, “There’s More Where Baidu Came From”).

David Liu, managing director of China tech banking at Jefferies & Co., expects valuations to keep rising in the wake of the Baidu IPO. He spoke about the Chinese tech market with BusinessWeek Online Senior Writer Steve Rosenbush. Here are edited excerpts of their conversation.

Q: How would you characterize Baidu’s valuation?

A: By any conventional standards, the valuation looks very high. Its valuation is higher than Yahoo, Google, or eBay. To justify this valuation, Baidu needs to grow faster than Google.

Q: Why did Baidu’s value reach its current level?

A: The valuation of Baidu was driven by a “perfect storm” of investment conditions. There haven’t been that many IPOs, and the market is starved for good growth ideas.

Lots of investors have been kicking themselves because they didn’t buy Google when it was in the 80s. It’s 300 now. We’re also seeing rapid growth of the China market. It’s a very large opportunity. It’s the second largest Internet market in the world, and over the next two years, pundits believe, it will become the largest Internet market in the world.

The valuation of Baidu was also driven by the rapid growth of online advertising and revenues related to search. And the nice thing about Baidu is we’ve seen this movie before — in the U.S. Everyone believes the same movie is going to play out in China and that Baidu will do as well as Google.

Q: But is the current valuation justified?

A: The company hasn’t disclosed forward-looking revenue numbers. The analysts who worked on the deal are in a quiet period, and we won’t see anything from them until 40 days after the IPO, or early September. Those reports will show their view on Baidu’s projections. Once the numbers come out, we can figure out whether the company’s projected growth justifies its current valuation.

Q: How will the Baidu valuation alter the outlook for M&A and IPOs in China?

A: There’s no doubt the Baidu IPO will affect companies that are in a related space, like Alibaba. Any Chinese search company today is going to look at the Baidu situation and start thinking more about launching an IPO than pursuing an M&A.

Baidu will have an effect on the broader market, too. There are only 30 China-based tech companies on the Nasdaq. That’s a very small sample, so every single deal has a meaningful impact on expectations. If you’re a China-based tech company looking to sell or go public, an event of this magnitude heavily skews that sample and what you think the value of your company is. In my opinion, the Baidu IPO pushes valuations beyond the point where many M&A deals can get done.

Baidu clearly affects companies with one degree of separation — those that are rivals of Baidu. And it affects the valuation of Internet companies, or companies with two degrees of separation. They will argue that they make their money by monetizing traffic, just like Baidu.

Tech companies, which have three degrees of separation, will argue that they’re tech market leaders, just like Baidu and deserve a similar valuation. And companies with a fourth degree of separation, which operate beyond the tech market, will argue that they deserve a valuation comparable to Baidu, too. But I think these arguments lose credibility unless the company is a search company or an Internet company.

Q: Can you be more specific about how Baidu will change the outlook for M&A and IPOs in China?

A: Baidu will have the biggest impact on search companies like Sina and Zhongsou, which compete directly with Baidu. It also may have an effect on companies like Alibaba, the b2b site. While Alibaba may be in talks with Yahoo, it’s unlikely to sell out entirely. It may sell a piece to Yahoo, then go public, just as job site eLong sold a piece to Barry Diller’s IAC/Interactive before it went public. [eLong was acquired by Interactive and is now part of spinoff Expedia.]

We’ll see more two track deals like this. M&A is difficult in any market growing this fast because the seller thinks it’s going to keep growing like crazy, and the buyer thinks expectations are too high.

Other companies on the cusp of M&A or IPO include China HR, the job site. Rival job site 51job (JOBS) went public last year. It was the second-best performing IPO on the Nasdaq. Another job site, Zhaopim, may also be close to IPO or deal. The same is true for Soufum, the real estate site. But once you get beyond search and Internet sectors, the influence of the Baidu IPO really starts to wane.

Q: Is there a danger that an M&A/IPO bubble is forming in the China market?

A: Valuations are based on a company’s future growth. If these companies perform well, the valuations will be justified. If they don’t, valuations will come down. That’s why quarterly performance is so important. These kinds of businesses are so new in China.

But there will be a new Google, a new Yahoo, and a new Microsoft that comes out of China. And these market leaders will justify their valuations. But these companies are relatively small, and it’s hard to pick which ones will be winners. That’s why investors get paid so much money. It’s particularly hard to pick winners in tech, which tends to be a winner take all market.

Q: Will Baidu be a winner?

A: It has the lead right now, but someone else could come along. Google wasn’t the first search company in the U.S., or even the second or the third. And most of those early leaders aren’t around today.

I was interviewed for the following article which was written by Brian Bremner and Justin Hibbard and published by Business Week on August 11, 2005.

The search engine’s runaway stock may spur Chinese Net IPOs — and rein in M&A as companies’ ideas of their own valuation soar How do you say feeding frenzy in Chinese? The moon shot of an initial public offering by Chinese Internet search engine Baidu.com (BIDU ) — whose $27-a-share launch on Aug. 4 jumped fivefold, to $154, before settling back to around $90 — shattered a five-year record for the best debut on the Nasdaq. It tapped into a deep investor hunger for the next Google (GOOG ) — which has seen its shares triple in the past year — and a desire to profit from the Internet in China, where some 100 million people now go online.

So will Baidu’s success unleash a flood of China Net IPOs? There’s good reason for excitement. Broadband subscribers in China last year more than doubled, to 43 million, and Beijing technology research firm BDA China is forecasting the online advertising market, worth $208 million in 2004, will expand to nearly $1 billion by 2009.

IPO INSPIRATION

Although the stampede into Baidu is partly based on the search engine’s similarity to Google, it also reflects optimism about that potential growth. That’s why many analysts are bullish on Chinese Internet companies. “We will see an expansion of the valuations. Baidu helped that,” says Piper Jaffray analyst Safa Rashtchy.

Indeed, some Chinese tech companies that have been considering a flotation might now jump in. “Given the success of Baidu, I’m sure some other Google look-alikes will be inspired to [do an] IPO,” says Khiem Do, head of Asian equities at Baring Asset Management.

At the same time, Baidu’s offering could put a damper on a wave of mergers and acquisitions among Chinese Net companies that had been picking up. Yahoo! last year paid $120 million for control of Beijing 3721 Technology Co., and it now appears to be close to a $1 billion deal to buy a one-third stake in Alibaba.com, an online marketplace for small and midsize Chinese companies.

“CROWD PSYCHOLOGY”

And in February online game pioneer Shanda Interactive Entertainment bought a 19% stake in portal Sina.com. After Baidu’s performance, however, Chinese Net entrepreneurs may believe their companies are worth more than potential acquirers are willing to pay. “The Baidu IPO pushes valuations beyond the point where many M&A deals can get done,” says David Liu, a managing director at investment bank Jefferies & Co. (see BW Online, 8/11/05, “Baidu: “We’ve Seen This Movie Before”").

All this doesn’t mean Baidu truly warrants its own sky-high valuation. Baidu, co-founded five years ago by former Infoseek engineer Robin Yanhong Li, is the mainland’s No.1 search engine, with 45% of the market. But the company earned just $1.45 million on $14 million in sales in 2004. At $90 per share, Baidu’s market capitalization is nearly $3 billion — which values it at more than 1,800 times 12-month trailing earnings, compared with price-earnings ratios of 70 or so for Google and Yahoo.

And Baidu faces intense competition. Its rivals include well-heeled U.S. search providers such as Google (which owns 2.6% of Baidu), smaller Chinese search sites, e-commerce players like Alibaba, and portals Netease, Sina, and Sohu. “We are in the realm of crowd psychology,” says Duncan Clark, BDA’s managing director.

WHO GETS BITTEN?

Investors might also note that the record of Chinese Net stocks has been mixed. Of the 10 Chinese tech companies that went public last year, 7 are trading below their offering price. Online 51job Inc., which went public at $14 in September, 2004, zoomed to $55 before falling to its current $13.

The one exception: Shanda Interactive, the best-performing stock on the Nasdaq last year. It went public in May, 2004, at $11 and now trades at $37.50, up 241%. Although Baidu’s IPO boosted some of the laggards, they quickly fell back to where they were before the IPO. In a feeding frenzy, it seems, someone always gets bitten.

I was interviewed for the following article which was written by Steve Rosenbush and published by Business Week on July 27, 2005.

Acquisitions and international investment holds the key to high wages, job growth, and productivity — all crucial to domestic tranquility Just a few weeks ago, it appeared that two Chinese companies were on the verge of making significant acquisitions in the U.S. Now, both deals are in peril. China-based appliance maker Haier (HRELF) appears to have dropped out of the bidding war for Maytag (MYG) in the face of a higher offer from Whirlpool (WHR). And China National Offshore Oil’s bid for energy company Unocal (UCL) has stalled in Washington, where political sensitivities over natural resources always run high.

Nonetheless, China remains poised to become a major player in the global mergers-and-acquisitions scene. Driven by fundamental economic and political needs, companies based in China will likely attempt larger deals over the next few years, especially in the technology arena.

RURAL STAGNATION

The primary driver of China’s M&A scene is social and political in nature. Beijing is worried about the prospects for political unrest. John Rutledge, a former economic adviser to President Bush, says disturbances and even riots in China are more common than many people in the West understand. While the Chinese leadership may not have to run for reelection, “it knows it can’t hold onto power without raising the standard of living,” says Rutledge, who now runs Rutledge Capital.

Despite China’s stunning economic growth during the past few years, the economic boom has yet to reach rural areas, where most of the country’s 1.3 billion people live. Wages in the industrialized coastal cities, where about 300 million people reside, have been growing 10% to 20% a year and total the equivalent of about $3,300 annually, according to David Liu, managing director at investment banker Jefferies & Co.

Liu says wages among the 1 billion people who live in the interior add up to about $352 a year — approximately one-tenth of what workers in the cities make in trades such as construction.

PUSHING PRODUCTIVITY

Through M&A, China can not only create economic growth but also help boost employment growth and raise wages. One part of that strategy involves Chinese companies buying troubled U.S. ones such as Maytag. With wages in China so much lower than those in the U.S., such deals also allow Chinese management to return broken-down U.S. companies to profitability, according to Liu.

But that game can only be played for so long. Wages in China will rise over time, and other low-cost centers of manufacturing, such as Indonesia or various states in Africa and the Middle East, will emerge.

To maintain its competitive advantage, Chinese companies must acquire technology that will make the country more productive — the real key to improved living standards.

TOP-TIER BUYS?

That was the thinking behind Chinese computer giant Lenovo’s purchase of IBM’s (IBM) PC division earlier this year (see BW Online, 5/9/05, “Lenovo and IBM: East Meets West, Big-Time”). It wasn’t for the brand, which Lenovo only can use for a few years. It was all about the technology, according to Liu, who heads up the company’s China business.

Bigger tech deals are on the way. “Chinese companies need to acquire top-tier technology in the U.S. and Europe. Buying second- and third-tier companies doesn’t really help, because they don’t boost productivity. What they really want to buy is Intel (INTC),” Rutledge says.

LARGER COFFERS

The process doesn’t have to occur overnight. Chinese leaders in business and politics, unencumbered by democratic elections and quarterly earnings expectations, can afford to wait more patiently than their counterparts in the U.S. And a lot can change in five years. The Lenovo deal would have been unthinkable five years ago.

China certainly possesses the financial wherewithal to make it happen. With $750 billion in liquid securities, the government has plenty of cash on hand. And the revaluation of the renminbi will strengthen the value of that currency in relation to the dollar, making it easier for Chinese companies to buy assets in the U.S. (see BW Online, 7/26/05, “China’s Revaluation: Don’t Fret”).

Formidable roadblocks to big-tech deals would exist. CNOOC’s Unocal bid has triggered a review in Washington that could drag on for the rest of the year, or longer. And it’s not clear that Unocal, which has a large percentage of its oil reserves in Indonesia, not the U.S., is really so crucial to U.S. strategic interests. The political opposition to a takeover of a major U.S. tech company may prove even greater.

THE RIGHT TARGETS

For now, Chinese companies will focus on more achievable goals, such as buying smaller and midsize tech companies. Liu participated in two such deals, including the sale of software maker Ross Systems to Hong Kong’s CDC Corp. (CHINA) in 2004.

Jefferies also sold Audiovox’s (VOXX) cell-phone division to UTStarcom (UTSI) last year for $165 million. While UTStarcom is based in Alameda, Calif., it does much of its business in China.

Such deals are fairly easy to close, assuming that the principals observe a few guidelines, according to investment banker Jeff Williams, principal of Jeff Williams & Co. Chinese companies need to pick U.S. targets carefully — deals that involve companies in aerospace and defense are still impossible to contemplate. But China is hardly alone in that regard. For now, only companies based in a few countries such as allies like Britain, France, and possibly Italy or Germany have a shot at making acquisitions in this area.

IRRESISTIBLE FORCE

China’s leadership will ultimately do whatever it takes to ensure a rising standard of living. And if China wants access to the top-tier technology that will boost productivity and growth, it may very well have to expand political freedoms at home to win approval of deals abroad.

Regardless of who ends up owning Maytag or Unocal in the short term, China’s emergence as a power player in the M&A market is only just beginning.