Legend confirms AOL's move into China

China's Legend made the first move to confirm reports of a Legend-AOL China alliance

By CNN's Kristie Lu Stout

HONG KONG, China (CNN) -- China's leading PC maker Legend Computer confirmed that it is in discussions to enter a joint venture with Internet giant AOL.

In a formal statement requested by the Hong Kong Stock Exchange, Legend made the first move to substantiate news reports and industry talk of a Legend-AOL China alliance.

Analysts are already reacting to news of the Legend-AOL pact, forecasting that it will put pressure on China's struggling portals to cut costs and consolidate.

Talks are on

"The company is in negotiations with America Online Inc. to explore opportunity for the establishment of an Internet related services joint venture targeting the consumers in Mainland China," said Legend chairman Liu Chuan Zhi in the statement.

"It should be stressed that the major terms of the transaction have not been determined and no agreement has been entered into at this stage. The proposed joint venture may or may not proceed."

"A further announcement will be made as and when appropriate," Liu added.

Representatives from AOL were not available for comment on the deal.

Legend's confirmation of AOL talks followed a day of dramatic trading activity that sent its shares surging 5.56 percent.

Shares in Legend closed Tuesday at HK $5.70, outpacing the 1.85 percent gain in the Hang Seng Index.

Legend shares rose again to hit HK $5.95 in morning trading on Wednesday.

China coup for AOL

Legend and AOL are reportedly close to finalizing a $200 million joint venture. The deal marks AOL's first step into China's fast-growing market of 22 million Net users.

Under the agreement, AOL would provide "interactive technology and know-how" to Legend's FM365.com portal site. Legend will hold 52 percent in the JV, but analysts say AOL will enjoy more perks from the tie-up.

"AOL needs Legend's brand presence in China, more than Legend needs AOL in China," said Nomura technology analyst Theodore Teo. "It gives them instant branding."

Legend is one of the most respected brands in the Mainland market.

Legend chief executive Liu Chuan Zhi said recently in Hong Kong that his company had 30 percent of the domestic PC market and 10 percent of the Asian market, and its profit rate had been 30 percent for the past three years.

Legend also has an extensive and immediate user base. Its FM365.com software has been preinstalled into each Legend PC.

Consolidation foreseen

AOL's alliance with Legend could lead to the bundling of its Internet services with Legend PCs -- a strategy similar to the one AOL employed to dominate the U.S. market.

Analysts already anticipate that an AOL presence in China is sure to rock the industry, spurring a wave of merger and acquisition activity as local Web portals scamper to trim down and consolidate.

"The online advertising revenue market in China has taken a precipitous drop right now," Kristian Kender of Strategic Intelligence told CNN.

"Now with the AOL-Legend link up you have an 800 pound gorilla coming in and sitting on your living room couch in terms of advertising spend."

Analysts say all four Nasdaq-listed China portal firms -- Chinadotcom, Netease, Sina.com and Sohu.com -- need to cut costs to boost revenues in a crowded market that will only get more uncomfortable when AOL enters the fray.

All four Web sites are all vying for control of China's limited $100 million Internet advertising market.

Rumors of a first wave of consolidation for China's dotcoms surround the recent departure of former Sina.com CEO Wang Zhi Dong.

According to a company statement, Wang resigned as the company's president and chief executive officer to pursue other interests.

But market talk suggests that Wang moved aside so a more suitable CEO could take the reins of the company as it woos potential buyers.

"There are rumors that Chinadotcom wants to buy them," one Beijing-based analyst told CNN.

AOL is a wholly owned subsidiary of AOL Time Warner, the parent company of CNN.