Commentary

A Cheap Ticket On eLong

Tech Market WatchBy Perry Wu
If you thought eLong.com (LONG), the Chinese online travel site, had cash after its IPO a few months ago, it was nothing. Because Barry Diller just spotted the company a whole lot more cash.

eLong's new majority owner IAC (IACI), Barry Diller's company, earlier last month exercised millions of warrants for the privilege of gaining its majority stake. This exercise of warrants produced a cash infusion to eLong of around US$108 million, almost double the amount of cash raised from its IPO. So along with its IPO, eLong's cash reserves can now be conservatively estimated at between US$115 million to US$130 million.

The bad news for investors is that Barry Diller seems to have gotten a real sweetheart deal. While the market price of eLong's stock is in the mid-teens, Barry got his shares for about US$6 a pop. That might be why eLong's stock has been depressed since the deal was announced a couple of weeks ago. The stock is now near all-time lows.

But the good news is that eLong has no shortage of cash; its cash position now rockets it to the top tier of Chinese online listed companies. And, unique among Chinese listed companies, eLong can now benefit from the talent of Barry Diller, one of America's premier dealmakers.

Even more intriguingly for shareholders, eLong's stock may even be almost a bargain. With a market value of around US$210 million, eLong's cash position is a full one-half or more of its market value. That means for each dollar of market value you buy, you are now buying at least fifty cents of pure cash. Sounds not so bad, huh?

Ahh, but there is a big "if". If Justin Tang, the head of eLong, can put the cash to good use then this stock may indeed be a bargain. But if Tang uses the cash to make large, ill-advised acquisitions, then the company's coffers will only get more depleted, with no value being added.

The best thing Tang could do is take a deep breath, discipline himself with a plan, and proceed deliberately. Perhaps just make a couple of small acquisitions and see how successful eLong is at integrating them. What are the chances he will do that? According to a profile written by the English-language China Daily, Justin says he "will be responsible for money from investors and shareholders". But in that same article, Justin conceded that "we do not exclude the possibility of doing mergers and acquisitions".

China.com (CHINA), Sohu.com (SOHU) and others all did large deals after being listed and the deals have not helped shareholders. And Tang's background in the investment area makes it hard to imagine that he will be happy to just sit and concentrate on organically growing his business. The man will probably want to deal.

But on the positive side, Tang has enlisted the abilities of Derek Palaschuk, formerly Chief Financial Officer at Sohu.com and now the new CFO of eLong. Palaschuk is now a veteran of listed companies, and theoretically may be able to counsel restraint. And Barry Diller, who now has a lock on voting control of the company, could exercise some trans-pacific guidance against foolish acquisitions.

With one week away from Chinese Lunar New Year, we are already in the midst of a travel stampede in China. I'm sure eLong is bursting at the seams to keep up with customer service issues, and rivals like Ctrip.com (CTRP) still provide an awesome marketing challenge to eLong. Don't forget the dozens of smaller, specialized travel booking companies, like Hengzhong Weiye, adding to the pressure on Mr. Tang.

eLong's biggest challenge (and the same advice goes to Ctrip.com) will be to craft a company that can withstand the turbulence of the travel industry. As we have seen over the past four years, SARS, tsunamis, floods, terrorist attacks, bird flu and earthquakes can immediately squeeze dollars out of the hospitality and tourism industries' hands. In order to make eLong truly valuable it needs to diversify its travel offerings to niche and novel travel sectors so it can ride through any storm.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.

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