As 2008 was drawing to an end, Focus Media Holding Limited (NASDAQ: FMCN) continued its tradition of ‘having a great event every year’ by announcing a US$1 billion M&A deal in China’s new media sector. On December 22nd, China’s leading online company SINA Corporation (NASDAQ: SINA) announced its intention to issue an additional 47 million ordinary shares to acquire the assets under Focus Media’s LCD display network, poster frame network and in-store network.
Calculated according to the closing price of Sina’s share on the previous trading day, the deal was worth US$1.374 billion. Although Sina was the nominal buyer this time, people were still dubious of Focus Media given its registered poor performance during 2008.
In his e-mail to employees, Tan Zhi, CEO of Focus Media, used the word ‘exciting’ to describe the management’s attitude towards the deal. During its six-year history, Focus Media has gradually grown into China’s largest new media platform from a LCD display network operator through M&As. In fact, as recently as two years ago, Jason Nanchun Jiang, the chairman of Focus Media, explicitly expressed his aspiration to acquire Sina. Now, the two parties have realized a merger through stock swap. In the eyes of Focus Media, this time, as previously, it simply resorted to the same means to achieve the same goal.
Focus Media: Changing its Course
The deal was reached in the chilly winter of the global economy for some inevitable reasons. Behind it was Focus Media’s intention to change its course to minimize the future uncertainties and survive the forthcoming cold winter.
In 2007, Focus Media posted an unprecedented good performance which was described by the sales managers of the company as an unstoppable express train. Consequently, Focus Media was the subject of much expectation in 2008. After building the digital media group which consisted of digital out-of-home, Internet and wireless advertising networks, the split and IPO of Allyes AdNetwork and Focus Wireless made two headline events for Focus Media in 2008.
However, the external environment underwent a thorough change. The March 15 SMS scandal (Focus Wireless and its patent company Focus Media were positioned as spam message maker on CCTV’s 2008 March 15th World Consumer Right Day program.) that occurred at the beginning of 2008 put an end to Focus Media’s dream to go wireless.
Allyes, on which great expectations were placed, downturned its forecast for the fourth quarter in its third quarter financial report because its Internet advertising business began to report decelerating revenues after the Beijing Olympic Games. Moreover, as an advertising agent, Allyes failed to make a major breakthrough on how to improve its profit margin.
After the release of the Q3 financial report, Wall Street responded strongly. The share price plummeted by 45% and once dropped to US$6 per share. Following the onset of global financial meltdown in the second half of 2008, Focus Media would not only have great difficulty in getting Allyes listed, but also faced a severe blow to the whole group.
To sell its LCD display network, poster frame network and in-store network (which accounted for 52% of its revenue and 73% of its gross profits in the first three quarters of last year) to Sina would undoubtedly solve two problems. Firstly, after the merger, the existing listed company of Focus Media would retain its Internet advertising network, cineplex advertising, and certain traditional billboards. As the latter two businesses accounted for a very small negligible fraction from the perspective of capital operation, Focus Media redefined its business through business transfer for the IPO of Allyes. And the wide-spread rumor that Allyes would be sold to Google became nonsense.
Secondly, it is doubtful that the market for the businesses with which Focus Media grew up, and the still well-performing LCD display business are saturated in tier-1 cities and lack impetus in tier-2 and 3 cities. After being merged by Sina, they will share Sina’s brand influence and customer resources to enhance the influence of single channel media and the resistance to risks in capital market.
In the eyes of Jason Jiang who was in his heart fearful of the uncertainties, Focus Media redefined its business, and appropriately arranged the two most important businesses to minimize the risks of uncertainty. The answer to people’s question why Sina did not acquire Allyes is quite clear. As an advertising agency with many clients, Allyes is not worth the acquisition by a media group. More importantly, Focus Media’s LCD display network, poster frame network, and in-store network are completely transferred to Sina. Leaders of sales teams for these businesses are mostly senior employees who witnessed the rise of Focus Media, and also the hard-core sales force of Focus Media. For Sina, the ability of these people will enable it to have a larger share in China’s advertising business. Its cross-media platform will also widen the gap between it and other portal rivals. Surely, it is because for this reason that people believe that the largest new media platform in the future, as announced by Sina, would actually be the largest advertising platform.
