By Perry Wu
On April 25, 2007, Tom Group announced that a proposal to take its Tom Online (TOMO) subsidiary private was approved by shareholders. This is a move that should quickly be replicated in many Chinese Internet companies hoping to have long lives.

Listed both on Nasdaq and Hong Kong's Growth Enterprise Market, Tom Online has already filed its necessary Form 6K. And after posting last week a 26% year-on-year decrease on its total first quarter revenues of US$35.14 million, the company should move as fast as possible to get out of the public spotlight.

Why do public companies go private? When a firm reduces the number of its shareholders to less than 300, it is no longer required to file reports with the the U.S. Securities and Exchange Commission. This is the result of maybe one company wanting to buy another company's publicly held shares or a firm plans to merge its assets with another company. But in Tom Online's case, the situation comes down to not wanting to have so much pressure from the public markets and the excessive price volatilities.

Why is pressure from the public markets bad for a Chinese firm? Very few Western investors understand the dynamics of China's media and technology space. Apart from this website ChinaTechNews.com, there are very few resources for potential investors and executives to make sound decisions in China's technology sector. Pressure therefore comes from unforeseen spots: a political calamity in China might manifest itself in worried investors ridiculously tying politics to the well-being of a Chinese technology firm. Or, as we have seen recently, investors get on the mobile and gaming bandwagon and think there are so many great opportunities for gaming and mobile value-added firms in China, so they pressure these technology companies to enter sectors better left forgotten.

Name one wireless value-added service company that is doing well in China. Sure, the owners of these firms cashed-out on the shoulders of their investors, but are Kongzhong, Linktone, or Hurray pushing the envelope of this sector, or are their checks bouncing? Tom Online was also pressured by market forces to enter this space, but it should have listened to its gut and stuck with more sustainable business models involving online niche content, online advertising, and online services. Wireless service revenues for the company were US$31.82 million this first quarter, representing a 28.4% decrease from the same period last year but a 7.5% increase from the previous quarter. Wireless Internet service revenues made up 90.6% of the company's total quarterly revenues! Yes, Tom Online is indeed creating revenue in this sector, but it better diversify before China Mobile and China Unicom close the spigot. Don't forget: China Mobile is the big brother in China and will never let the MVAS firms win.

So by going private, a company like Tom Online can look more at long-term growth instead of the worried reactions quarterly reports might cause investors and the company's stock price. As a private firm, the company can also take a few more risks that may pay big dividends down the road.

Another example of outside pressure was the deal Tom struck with Skype. At the end of March 2007, the company had over 35.5 million registered Tom-Skype users, up from over 31.5 million at the end of January 2007. Where is the money from this arrangement, investors have asked, and how will Tom monetize this relationship? Little information has been forthcoming from the companies most likely because this was a deal meant to build buzz, but not to generate immediate cash. Perhaps in a few years Tom can earn big money from this relationship, and it can do so best by being a private company focused on the horizon, and not the dashboard.

When Tom Online goes private, it can also negotiate much more flexible governance arrangements with its investors. Strict Sarbanes-Oxley corporate governance in the United States is a big reason Chinese firms are now looking to London, Toronto, or Tokyo or opting for Hong Kong GAAP over the more comprehensive U.S. requirements. In fact, as I have said many times before, I am very certain we have a number of brewing catastrophic accounting nightmares waiting in the accounting books of a few listed Chinese Internet portals and technology companies. As a private company, its cash situation is just between itself and the tax bureau, and the more dubious a company's accounting seems to be, the better it is for the firm to go private.

I wish Tom well on their move to go private, and I think that with the great liquidity reached by rivals Sohu.com, Sina.com, Netease.com, and China.com, they too should think about buying their public shares and focusing on building great products that will enhance China's economy instead of worrying about quarterly earnings reports and the value of their executives' stock accounts.

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.