Pacific Century Cyberworks Limited: the Bid for Cable & Wireless Hkt Limited

HKU173 SU HAN CHAN KO WANG PACIFIC CENTURY CYBERWORKS LIMITED: THE BID FOR CABLE & WIRELESS HKT LIMITED It was a hastily arranged lunch in late January 2000. Fang Fenglei, Chief Executive of Bank of China International, and two senior executives from China Telecom (Hong Kong), were having serious discussions with a visionary, big-thinking young man in Hong Kong over a proposed merger of equals between Cable & Wireless HKT Limited (“HKT”) and Singapore Telecommunications (“SingTel”). As a Chief Representative of the Chinese state-run bank’s investment banking arm in Hong Kong, Fang was far more than an aggressive deal maker who had successfully managed the initial public offering of China Telecom (Hong Kong) in 1997. He was perceived by the young man as being particularly close to the seat of power in Beijing. Through his peculiar connections, Fang might have known of Beijing’s attitude to SingTel’s bid for HKT. As the group tucked into their soup, Fang prompted the young man to consider launching a rival bid for HKT. He cited what he called ‘the strong negative reaction of the Hong Kong people” to SingTel’s bid for the leading telecommunications company in Hong Kong.1 The young man did not express an opinion, as he thought launching a rival bid “would be too big” for his company.2 The young man was Richard Li Tzar-kai, the 33-year-old son of the property tycoon Li Ka- shing, who controlled two of Hong Kong’s biggest conglomerates, Cheung Kong and Hutchison Whampoa, and was said to collect six cents from every dollar spent in Hong Kong. Li Ka-shing, one of the top advisors to Deng Xiaoping in China before the handover of Hong Kong in 1997, was often seen as having unparalleled connections with Beijing. His son 1 Gilley, B., “Working Lunch”, Far Eastern Economic Review, 30 March, 2000. 2 Gilley, B., (2000). Mary Ho prepared this Case under the supervision of Prof. Su Han Chan and Prof. Ko Wang for class discussion. This Case can be used in conjunction with “The Divestiture of Cable & Wireless HKT Limited” and “Singapore Telecommunications Limited: The Bid for Cable & Wireless HKT Limited” in a bilateral/trilateral negotiation exercise. This Case is not intended to show effective or ineffective handling of decision or business processes. This Case is part of a project funded by a teaching development grant from the University Grants Committee (UGC) of Hong Kong. © 2002 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise (including the Internet) - without the permission of The University of Hong Kong. Ref. 00/72C 24 January, 2002 1 00/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited Richard had apparently inherited the personal connections that his father had always smartly manoeuvred. In recent years, Richard tagged along with his father in meetings with the top Chinese leaders Zhu Rongji and Jiang Zemin. The powerful connections of the Li family were reflected in the decor of Richard Li’s sumptuous corporate dining room at his headquarters. Hanging on the wall were photographs of his father with the old powerful leaders, ranging from Margaret Thatcher to Lee Kuan Yew, the former Prime Minister of Singapore. Lee Kuan Yew was a respected friend of the Li family. Challenging SingTel’s bid for HKT would mean that Richard had to snatch the prize from the grasp of Lee Hsien Yang ⎯ the President and CEO of SingTel and the son of his respected friend. If he did this, what would be the value added to his Internet startup Pacific Century CyberWorks Limited (“PCCW”)? Despite initial misgivings, Richard Li was receptive to Fang’s idea. A few hours after the lunch, Richard had to leave for Switzerland to attend the World Economic Forum. Before he left, however, Richard asked Francis Yuen, vice-chairman of PCCW and Mico Chung, executive director of PCCW, to consider the possibility of launching the biggest rival bid in Hong Kong’s business history. PCCW Unlike his father, who founded the family’s fortune on the old economy of property, ports and telecommunications, Richard Li was determined to blow up the old order in Asia by building an Internet empire through his company, PCCW. Incorporated in April 1979, PCCW, formerly known as Tricom Holdings Ltd, commenced business as a systems house specialising in the distribution and marketing of telecommunications products. Though the company became listed in 1994, it did not attract the attention of investors until Richard Li purchased it as a backdoor listing vehicle through Pacific Century Group (“PCG”) in mid- 1999.3 Subsequent to the acquisition, Tricom Holdings was renamed as PCCW on 3 August, 1999, and several of PCG’s Hong Kong and mainland investment and development properties were injected into the company. In December 1999, PCCW sealed a deal with the Hong Kong Government to build a HK$15.8 billion high-tech centre known as the Cyberport. The deal triggered a storm of protest as Richard Li got the prize from the Government without competitive bidding. Following the controversial deal, the stocks of PCCW were keenly sought after by investors, who believed that the deal added a high-tech element to the company. The stock rocketed from a low of HK$2.8 in August 1999 to a dizzy high of HK$19.5 in late December 1999. The high-tech project Cyberport also sparked a torrent of dot-com startups in Hong Kong. Exhibits 1A and B show the stock price performance of PCCW from 1998 to 2000 and the market valuation as at the end of January 2000. Since mid-1999, PCCW had been “doing Internet deals at the rate of about once a week”.4 In early 2000, PCCW had become a leading Internet company in Asia. It was engaged in technology business relating to the Internet and the delivery of broadband ISP-enabling services and technologies. The astute deal-making ability of its Executive Chairman Richard 3 Backdoor listings shorten the timetable for the listing process. It is an option for companies that do not intend to go through initial public offerings but want to have their companies publicly listed. Backdoor listings involve buying a majority stake in listed firms that have relatively few traded shares (which are often called shell companies) and injecting assets into them. Backdoor listings may not initially raise funds for the companies but they do create the opportunity for them to quickly raise equity at a later date through a share placement. 4 Snoddy, R., “Pacific in battle for control of C&W HKT”, The Times (London), 12 February, 2000. 2 00/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited Li had turned the company into one of the most preferred partners for regional and international Internet and technology-related companies. Financial Position PCCW’s financial statements for the years 1995 to 1999 are presented in Exhibits 2 and 3. As at 31 December, 1999, the group was cash-rich and had a low gearing. Its operations were mainly financed by cash, short-term borrowings and convertible bonds. Despite having a strong cash position, PCCW’s financial results were not very impressive. In the year 1999, the group reported net profits of HK$347 million. Following the restructuring of the group’s business, reliance on service-based projects was significantly reduced. However, excluding the investment gains on certain listed securities that were classified as other investments (HK$37.1 million was realised and HK$537.2 was unrealised), the group had actually suffered a loss of HK$228 million. If the group was to finance its investments in the Internet and technology-related businesses in Asia, it would have large ongoing capital needs. Investments and Alliances The PCCW Group had significant investments and alliances with international partners through its subsidiaries. These companies included Pacific Convergence Corporation and CyberWork Ventures. Pacific Convergence Corporation Pacific Convergence Corporation (“PCC”) was a joint-venture holding company 60%-owned by PCCW and 40%-owned by Intel Pacific Inc. PCC was developing a branded service called Network of the World (NOW), which would provide broadband Internet connectivity, specific broadband content and service offerings to consumers and enterprises in various languages, combined with a supporting infrastructure that allowed electronic transactions and commerce. The launch of the NOW service was initially expected to take place at the end of June 2000. Consumers and enterprises could access the NOW service through Internet access devices such as personal computers, televisions and wireless devices with digital Internet access functions. The platform would first be available to 130 million cable television- enabled households in Asia and would be rolled out to the rest of the world soon after. To set up the NOW programmes (that looked like regular TV programmes but allowed interactivity, like Websites), PCC had been luring talented content creators from California. The strategy of NOW was unconventional. Some doubters said that PCCW and Intel were digging a black hole for their investments, as many ordinary Asians could not even afford to buy a computer. However, Richard Li was determined to send customers what he called an “unimaginable array of applications and quality information” through unconventional television sets that functioned as network computers.5 He envisioned that his customers could access information on agricultural techniques, small-business finance, university courses, weather forecasting and family planning, etc. and download MP3 songs by using NOW. “We had to make a bet in Asia.

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