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November 30, 2000

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MARCH 10, 2000 VOL. 26 NO. 9

Coming of Age
Hong Kong's most successful Internet company wins control of telecom giant Cable & Wireless HKT. Now what?

Vincent Yu/AP; Photo Illustration by Emilio Rivera III
The Winner: Richard Li Tzar-kai

For someone who has just committed to spend up to $38.1 billion in a buyout of Hong Kong's oldest telecommunications company, Richard Li Tzar-kai looks remarkably relaxed. "Do I have to be serious all the time?" the 33-year-old bachelor asked Asiaweek a day after his 10-month-old Internet company, Pacific Century CyberWorks (PCCW), outmaneuvered state-controlled Singapore Telecom and media magnate Rupert Murdoch in a brief but epic battle to acquire Cable & Wireless HKT. Li (estimated net worth: $6.5 billion) also persuaded four banks, including HSBC Holdings and Bank of China, to lend him $11 billion, a record in Hong Kong. In February, he raised $1 billion in a matter of days through a PCCW share placement that was 40 times oversubscribed.

And Li may only be warming up. "PCCW has openly stated that it wishes to become the biggest broadband player in the world," says Richard Ferguson, a telecom analyst with brokerage Nomura International in Hong Kong. "That means it cannot afford to stand still. Its acquisition of HKT may look like an important deal, but it is a minnow in global terms." Asia's largest merger-and-acquisition transaction - it exceeds the $33.8-billion union of Bank of Tokyo and Mitsubishi Bank - a minnow-like matter? Welcome to the Age of the Internet.

It seems any corporation, even the most established, can now be a target of a hot Internet start-up. In January, Internet service provider America Online merged with media behemoth Time Warner in a $165-billion deal - with the web firm as the senior partner. "A lot of brick-and-mortar companies are only now beginning to realize that it is possible for an upstart like PCCW to do a lot more than most people thought it could," says Hani Abuali of U.S. stockbrokerage Donaldson, Lufkin and Jenrette. "What is happening is that the market is giving these start-ups a lot of capital to go out and be a threat to existing companies. For a company like PCCW to do what it has in 10 months - that has really shaken up corporate Asia. Everyone in old-economy boardrooms now wonders how to show shareholders [that the current management] can extract more value from the existing business."

Even now, Li is plotting more acquisitions. He was in London during the Chinese New Year, before PCCW made its bid for HKT. Britain's Cable & Wireless owns 54% of HKT. "But I was there for another deal," says the tycoon. He was also seen in Beijing, where he met with Bank of China chairman Liu Mingkang - in connection with yet another matter, says Li, not to arrange a loan for PCCW's bid. "We have a lot of strategic plans," he says (see interview page 56). PCCW will launch an Asia-wide satellite-and-cable broadband network this year, which will pipe sports and entertainment programs into the region's homes as well as allow high-speed access to the Internet. It is building a $1.6-billion residential and office center for technology companies in Hong Kong. It also invests in Internet start-ups in Asia and elsewhere.

Cover: Internet money goes shopping in Hong Kong and what PCCW-HKT means for old-economy firms in Asia
• Players: The deal, the winners and the losers
• Interview: Richard Li on bagging the region's biggest buy
• SingTel: What now for Singapore Telecom?
• Chart: Comparing PCCW and Cable & Wireless HKT
• No. 1: The Lis are definitely Asia's top business family

Editorial: Taiwan should respond to China's peace feeler - hidden in a war threat
Editorial: India's RSS must curb its chauvinism

Philippines: Amid terrorist attacks in Mindanao, President Joseph Estrada plays tough with MILF insurgents
Brunei: The sultanate sues Prince Jefri
Singapore: Behind Ong Teng Cheong's maverick presidency
• Extended Interview: Ong does not regret riling his former colleagues
Nepal: Why the Maoists are resurgent

Green Stakes: Why Asia has to clean up - fast
• Snapshots: Where countries stand on the environment
• Eco-warriors: Fighting to save the planet
• By Design: Ideas that can make a difference

Exhibitions: The art world - a proxy cross-straits battlefield
Newsmakers: India's pointman for defense

Real Estate: Building up Indonesia's multimedia dreams
MyWeb: As this Malaysian Internet company proves, a U.S. listing is not an automatic road to riches
Investing: Don't use yesterday's rules to value tomorrow's hottest telecommunications companies
Business Buzz: CLOB gets resolved

Viewpoint: Political reform is inevitable in China

These projects are mainly funded by PCCW shares, whose price has soared more than 19,000% since Li took over small Hong Kong-listed computer-parts supplier Tricom Holdings and transformed it into PCCW last year. Li raised cash by selling PCCW shares in a series of private placements, each time increasing the price-per-share as retail and institutional investors, dazzled by its Internet promise, pushed up the company's market value. The stock price reached a high of HK$28.50 ($3.65) on rumors of the HKT takeover - then fell 28% to HK$20.40 March 1, when it resumed trading after a three-day suspension. Li says investors who like pure Internet plays may be bailing out of PCCW because of its alliance with an old-economy telecom company. But he is confident that PCCW's share price will remain solid.

The market's valuation is important for Internet firms like Li's, which depend on cash from placements and exchange of shares with target companies for expansion. If PCCW's share price plunges too far, Li will have little room to maneuver. But some analysts say that will happen anyway as Asia's love affair with technology stocks inevitably turns sour. "Richard Li is smart," says a Hong Kong fund manager. "He knew he was holding overvalued currency [with his high-priced PCCW shares]. He has gone out and bought a lot of goods which he can later sell piece by piece for real money when the bubble bursts." Adds Robert Rountree, a regional strategist at Prudential-Bache Securities in Hong Kong: "Li now has a company that has all the traditional things like sales, cash flow and even profits. He can go to fund managers and say: 'We are not just a virtual company.'"

Seen in that light, Li's $38.1-billion cash-and-share offer does not look very expensive. PCCW gives HKT shareholders two options: receive 1.1 PCCW shares for each HKT share they hold, or accept 0.7116 of a PCCW share plus $0.929 in cash for each HKT stock. If everyone goes for the first option, Li will not need to shell out any cash. That is unlikely - Cable & Wireless needs money to fund its own foray into the Internet and data services. Since it owns 54% of HKT, the British company can receive as much as 7.1 billion pounds - $11.4 billion - and up to 20.9% of the new entity, to be named PCCW-HKT. Under the agreement, a big part of that stake cannot be sold for six months to a year. If everyone else chooses the second option, Li will need to pay out more than $12 billion in cash and will be left with 37% of PCCW-HKT. He hopes the majority will opt for the cash-and-stock option, "then we can end up with more shares."

PCCW formally made its offer for HKT on Feb. 11. It won the prize Feb. 28 - less than three weeks later. SingTel had been talking to Cable & Wireless since November last year. "When news reports [about the planned acquisition] went out, we had to go public but we were not ready yet," recalls Li. "Two weeks ago, I wasn't even sure I can win." Before PCCW's entry, commentators were already describing a SingTel-HKT "merger of equals," as the Singaporeans dubbed their proposal, as a done deal. Details of SingTel's bid have not been made public. But it raised its initial offer after Rupert Murdoch agreed to invest $1 billion in SingTel if the company succeeded in buying HKT. SingTel CEO Lee Hsien-yang, a son of former prime minister Lee Kuan Yew, flew to London to present the improved offer.

So did Li, who says he gave Cable & Wireless's board an ultimatum: "We told them we have a time limit." The directors unanimously chose PCCW's offer in the small hours of Feb. 28. Sources say their decision was prompted in part by the support of Beijing-owned China Telecom, which has 10.8% of HKT. Li, Cable & Wireless and the governments of Hong Kong and China all deny that politics - and pressure from Beijing - played a role. "This is purely a commercial decision for HKT to make on its own, no doubt in the light of the views of the board of directors and what is the best deal from the shareholders' point of view," insisted the SAR's Chief Secretary Anson Chan last week. Hong Kong's concern, she says, is to make sure there is a level playing and that whoever buys HKT's telecom license complies with all regulatory requirements.

A lot of people are not convinced. When a SingTel-HKT merger looked imminent in January, Hong Kong politicians began sounding off about the Singapore government's influence over HKT. Sin Chung-kai, a legislator representing the information-technology industry, accused Singapore of trying to buy HKT because its telecom market lagged Hong Kong's and expressed fears about possible meddling by Singapore politicians in the merged entity. Beijing-controlled newspaper Wenhui Daily weighed in with a report that the central government has "indirectly expressed its disapproval of the [SingTel-HKT] merger." Declared the daily: "If Cable & Wireless intends to sell its stake, there are quite a few consortiums in Hong Kong financially strong enough to buy it."

It escaped no one's notice that a Bank of China subsidiary, BOCI Asia Limited, was helping PCCW with its bid, along with European investment bank Warburg Dillon Read. (Goldman Sachs advised SingTel, a rare instance of the American bank backing a losing bidder.) SingTel persevered, but the question of Singapore control dogged its pursuit of HKT. The Hong Kong company's independent directors reportedly demanded that Temasek Holdings, Singapore's investment arm, cap its stake in the merged entity to below 30%. Temasek owns 76% of SingTel, which meant it would end up with a near-majority of the SingTel-HKT combine. An ominous sign came Feb. 25. HSBC abruptly resigned as an adviser to the independent directors of HKT. News later broke that its commercial-lending arm would lend PCCW money for its bid.

A furious SingTel reportedly threatened to sue HSBC. The bank had access to sensitive information about SingTel's offer because it attended briefings for HKT's independent directors. The lawsuit has yet to materialize. SingTel drew another weapon in Rupert Murdoch. In addition to the $1 billion in new money, which would have given him 4% of SingTel, the Australian-born tycoon signed an agreement to develop a broadband network in Singapore and elsewhere with SingTel. Murdoch's buy-in will no longer go forward since SingTel did not merge with HKT, but the broadband project is still on (see story page 58). Murdoch's satellite broadcaster, STAR TV, also has a deal to provide HKT with content for its broadband lines in Hong Kong. It says the pact is legally binding and should not be affected by a change in HKT's ownership.

But Li says STAR TV can choose to bail out if it wants. He and Murdoch are due to meet next week to thrash things out. They know each other - Li founded STAR TV, which he sold for $950.5 million to Murdoch in 1992. (At the time, many observers said Murdoch paid too much for a broadcaster that has yet to make money.) The outcome of the Li-Murdoch talks will be closely watched. On the day PCCW won the right to buy HKT, STAR TV CEO Gareth Chang resigned. Li says PCCW already has the content for HKT's broadband network through a venture with American sports broadcaster Trans World International. PCCW has also formed Network of the World, a multimedia outfit that will source TV shows from overseas as well as engage in e-commerce and other Internet activities.

Still, Murdoch brings more than content to the table. STAR TV has access to the satellites that PCCW can use for its satellite-cable broadband infrastructure. It also claims to have developed a platform for an integrated system unifying diverse services like pay-per-view shows, interactive TV and web browsing. Both STAR TV and HKT are on a Hong Kong government shortlist for a pay-TV license that will be granted later this year. Li says he bears no grudges. He is also open to working with SingTel - although there is bitter talk in PCCW about the Singaporean company's attempt to prevent Li from getting HKT even after it became clear SingTel would not win the bidding.

What now for HKT? Li will certainly keep HKT's broadband network, which covers more than 80% of Hong Kong homes and all the city's business areas. The speculation is that the mobile-phone network may go, perhaps to Hutchison Telecom, which is owned by his father, Li Ka-shing. But that move will intensify complaints about conflict of interest and the Li family's dominance of Hong Kong business (see story page 60). Other HKT assets to be put on the block may include the international-calls division - HKT has lost its monopoly over the service. Any money raised in asset sales will help Li retire the loans he took out, although HKT already boasts a substantial cash hoard.

Some worry that PCCW may find itself out of its depth, given the breadth of HKT's businesses and its 13,600 employees (PCCW employs just 440 people). "I'm sure Richard Li is going to wake up one of these days and realize he's bought another of those old telcos," says a Hong Kong fund manager. The telecom company has had run-ins with its workers over a plan to trim staff numbers and streamline compensation packages. There is resentment over the sale. "Cable & Wireless is like a mamasan in a whorehouse," HKT CEO Linus Cheung Wing-lam told Asiaweek. "After making profits off the star courtesan, she is now ditching her." All this helps explain the recent fall in PCCW's stock price. "The Cable & Wireless board sent investors a very pertinent message," says John Lai, chief investing officer of Nikko Asset Management Asia. "They wanted more cash [instead of the shares] PCCW was offering. And they will swap $500 million worth of the PCCW-HKT shares they will get with the stock of American Internet firm CMGI, which has a 4.4% stake in PCCW."

Others see benefits for PCCW. "So far, it has had only moderate success signing up local cable operators in China for its broadband project," says Greg Feldberg of Indosuez WI Carr Securities in Hong Kong. "These companies must upgrade their networks for the service. HKT may be able to help, for instance by working with China Telecom to develop broadband access through local phone lines. PCCW has talked mostly about cable modems - sending content via cable TV lines. But it can lean toward digital subscriber line technology, which increases the capacity of ordinary telephone wires." In other words, Li may be able to pull off this mega-deal - if he has the patience and the will to really run a brick-and-mortar company.

With reporting by Alexandra A. Seno/Hong Kong

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