China’s internet security giant Qihoo 360 is set to listing on the Shanghai stock exchange after it was delisted from the New York Stock Exchange last year.
“Countless people call me every day to ask me if I want to buy a shell company,” Zhou Hongyi, chairman of Qihoo 360 Group, once complained to reporters. In spite of his straightforward reputation, he was tight-lipped about which company he bought.
But now, Zhou is revealing which shell company gave Qihoo 360 its path to an A-share listing.
Yesterday evening, the listed SJEC Elevator (601313. SH) issued a notice that Zhou and the two companies under his control would jointly acquire SJEC. The report said Zhou would be the actual controller of the listed company after the transaction.
The next step will see Qihoo 360 will formally return to an A share listing via SJEC. Zhou thanked his team on WeChat Moments in the early hours of the morning, saying, “The team is still working at midnight. I am grateful for their persistence, strength and tenacity in the past few years.”
According to the report, total assets and trade reached 50.4 billion yuan, accounting for 1,789.27 percent of the listed company’s valuation, which was 2.8 billion yuan at the end of 2016.
Behind the surface, both strategically and tactically, it is likely to be the most complicated “return” in the Internet field.
When Qihoo 360 delisted from the US stock market, its market value was $9.3 billion (61.5 billion yuan). But public opinion held that based on the differences between US stocks and the A-share PE, once Qihoo 360 returned to the A-share, its market value would grow many times over.
China International Capital Corporation (CICC) said that if Qihoo 360 returned to the A-share market, its value would be as high as $61.3 billion (380 billion yuan), equivalent to nearly eight times its existing market value.
The values of Baidu, Alibaba and Tencent are about $70 billion, $210 billion and $200 billion respectively, followed by JD.com and Netease, whose values are $54 billion and $36 billion.
Qihoo360’s return to A-share listing has become an event that may change the development of China’s Internet giants. For companies that don’t want to be connected with Qihoo 360, such as Baidu and Tencent, they may take corresponding measures to seek a counterbalance.
The Push for a Shell Company
It’s been more than a year since Qihoo 360 delisted in the US. The stock market has heard rumors of its planned backdoor listing ever since.
Every time Zhou meets a reporter, he is asked about borrowing a shell company.
Last year, when talking about backdoor listings, Zhou said people called him to recommended potential companies every day. “There are too many rumors. So far, I haven’t considered the capital, nor have I talked with any company,” he said.
Qihoo 360 has since settled on a backdoor listing.
The report showed Zhou controls two companies: Tianjin Qixinzhicheng Technology and Tianjin Zhongxin Equity Investment Partnership.
The controlling shareholder and actual controller of Tianjin Qixinzhicheng Technology is Zhou, who directly holds a 17.38 percent of the shares as the largest stakeholder. In addition to him, the company has another 36 major stakeholders like Sequoia Capital, Sunshine Insurance Group and Pingan. The actual controller of Tianjin Zhongxin Equity Investment Partnership is also Zhou, who holds 99.1 percent of the stock.
After the transaction, Qixinzhicheng Technology will hold 48.74 percent of SJEC’s stock and will be its controlling shareholder.
Zhou holds a 12.14 percent stake of SJEC directly, and indirectly controls 48.74 percent via Qixinzhicheng and 2.82 percent via Zhongxin. In total, Zhou holds 63.70 percent of the company and is its actual controller.
It is worth noting that the total assets and trade is 50.4 billion yuan, accounting for 1,789.27 percent of the listed company’s valuation, which was 2.8 billion yuan at the end of 2016.
This transaction constitutes a reorganized listing. It must go before the China Securities Regulatory Commission for review and cannot be implemented until approved by the commission.
Why Risk Returning?
Qihoo 360 officially withdrew from the New York Stock Exchange in July 2016. Its private funding came from the mortgage of the Qihoo 360 building and a series of loans against “360 ” trademarks, as well as a $3 billion loan from China Merchants Bank.
Zhou jokingly told reporters, “I might be China’s biggest debtor – the ‘negative man.'”
So why did Qihoo 360 seek a new listing?
Zhou said Qihoo 360 had a ‘different motivation’ from many China Concept Stocks planning to be privatized. A few years ago, the head of a relevant department of state spoke to Zhou several times and made the country’s expectations clear.
China had started to realize the importance of network security as a component of national security at that time. Qihoo 360 had more than 360 million customers and provided security protection software and solutions for many sensitive organizations including the government, institutions of foreign affairs, scientific research institutes of national defense and banks. Inevitably, the company ran into “identity problems.”
Although Qihoo 360 was controlled by Chinese staff, it was listed in the US and its funding came from abroad. In terms of capital structure, Qihoo 360 was a foreign-invested company. It was considered unsafe to put China’s core enterprise security, national security and infrastructure security in the hands of a foreign-invested company.
“It’s different from entertainment and social companies that are listed in the US,” Zhou said.
“We offered network security and solutions to many sensitive departments. If Qihoo 360 were a foreign company, it couldn’t receive the necessary qualifications. So we returned to China to play a more important role in network security,” he said.
During the privatized delisting, Qihoo 360 built two SPVs, Tianjin Qixinzhicheng Technology and Tianjin Zhongxin Equity Investment Partnership, whose registered capital was 57.5329 million yuan and 56.1766 million yuan respectively.
In addition to Qihoo 360 chairman Zhou and president Qi Xiangdong, some 39 institutions also invested in these two companies. One was ESOP and the other were 36 outside investors, including risk capital and private equity.
Zhou said Qihoo 360 required the buyers to use their own funds, so buyers were mainly large state-owned enterprises, professional investment funds and insurance companies. In addition, the selection criteria for investors required cooperation with Qihoo 360 and a focus on domestic development.
Zhou required all Qihoo 360 investors to pledge that their investments could not come directly or indirectly from any public offering or financial product. Without an accurate disclosure in accordance with the agreement and without rectifying it within the prescribed time, buyers would have to pay 30 percent of their total investment in liquidated damages to Qihoo 360 .
Zhou said 360 turned down a lot of investors who wanted to take advantage of the opportunity and make a fortune.
Next Step for Qihoo 360
Zhou has been reluctant to discuss Internet security in-depth. He seems to have been more interested in talking about mobile phones.
But at the China Internet security conference in September, Zhou was quite talkative. During a noon interview on September 12, Zhou headed straight for the bottled water and drank nearly two-thirds of it.
Throughout the talk he emphasized “big security.”
As for the concept, Zhou said Jack Ma thought of “new retail” and he thought of “big security.”
“We are in a big security era,” Zhou said in an interview. Cyber security is not just the security of the network itself, but also national security, social security, infrastructure security, urban security and personal safety.
“Security is big. The public understanding of what Qihoo 360 does should go beyond free antivirus services and phone blocking. In fact, Qihoo 360 can play an important role in industrial security, social security, national security, cyber-attack and defense,” Zhou said. The integration of the military and the people is also an opportunity for Zhou. The biggest benefit of Qihoo 360’s privatisation was identity.
Zhou compared Qihoo 360’s privatization process to an adventure. The next step in the “adventure” may be “a second startup,” he said.
Zhou told reporters Qihoo 360 was restructuring or splitting its business over the last two years to transform the company from a large ship into a fleet.
Zhou said its’s security business would become two companies, namely TO B and TO C. Its corporate security group would form a subsidiary under Qihoo 360 Group, which will be headed by CEO Qi Xiangdong. Meanwhile, Qihoo 360 ‘s smart hardware business would remain independent.
“In the future, we will split all businesses requiring a second startup,” Zhou said. After the split, the branches will be subsidiaries under Qihoo 360 Group, with independent accounting, and staffing.
“If you have the same criteria for mature and innovative businesses in a company, innovative businesses will never develop. For instance, if Tencent didn’t invest in Didi but built its own car hailing business, do you think it would work? Not necessarily,” he said.
In addition, Zhou said he hopes to motivate employees by splitting up the company. Each employee can have a partner identity, which is equivalent to internal entrepreneurship.
Head Image: Zhou Hongyi