By Perry Wu
Over the last few months I have been idly viewing the machinations at CDC Corporation (CHINA). The company has seen its acquisition hands slapped away by Onyx, it has created a new board for its CDC Software subsidiary, and it is now moving to split its more lucrative software division from its old-school Internet portal division.
On March 22, CDC Corporation created a separate board of directors for its CDC Software subsidiary. And it makes sense. In 2005, the CDC Software subsidiary part of the company generated about 80% 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' longterm 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 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 US$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 US$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".
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:
1. 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.
2. 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. Anybody who has been through an MBA program should have heard that First Commandment drilled into their heads multiple times. So in true pedantic style, let's repeat: "If you are running a public company, diversification is not your job. It's the shareholders' job."
So this is why I am pleased to see a separate board created for CDC Software. This is why I expect the company to soon spin-off different parts of itself so that there is not so much mucking about with such different businesses.
But even separate, 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.
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. Yes, China.com is a decent-sounding domain name, but that really doesn't mean much when you have whacky names like Yahoo, Google, Sohu, and Sina grabbing all the users.
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.
I bring this language example up because it points to the schizophrenic nature of what China.com is trying to do. 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.
A recent book by former Dow Jones China chief James McGregor gives a good, but too brief, overview of the shenanigans from which the current CDC Corporation stakes its claim to all things Internet in China. McGregor puts down in ink what was only rumored through the halls of China's Internetdom, and he suggests CDC has a credibility problem. Certain executives at CDC probably should leave the company for it to gain any sort of legitimacy among investors and peers.
Before CDC Corporation splits, it has many decisions to make about its personnel and its brands. I would like to see it utilize its vast resources to build great brands, but that is only possible if it can focus. But after ten years of watching this company morph, I worry that its corporate DNA is already ruined.
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.