Renren listing: sign of dot-com bubble 2.0?
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Will the real Chinese Facebook please stand up?
Not long ago, Qihoo 360 Technology took its show on the road overseas, dubbing itself "China's Facebook." The company, China's largest provider of antivirus software, has little to do with social networking, much less Facebook. But the mere mention of the U.S. wonder start-up was enough to make bankers drool and investors open their wallets. Qihoo 360's U.S. IPO raised $175.6 million, 25 times its 2010 sales. The average price-to-sales ratio of 26 Chinese firms traded in the U.S. was only 4.7, according to a Bloomberg report.
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Renren's IPO sold 53 million shares at $14 each, well above earlier analyst expectations of a $9 to $11 per share price and at the top of the company's recently revised projection, on strong investor demand despite high valuation ratios and questionable financial data. The sale raised $743 million, giving Renren a post-IPO value of about $7.5 billion..
The one behind 'everyone'
The Renren Network, which literally translates as the "everyone network," cannot be mentioned without one man in particular – Chen Yizhou. As chairman and CEO of Renren-owner Oak Pacific Interactive, he holds 270 million class B shares of Renren, or 22.8 percent of company stock, making him the firm's biggest shareholder and giving him absolute control with 55.9 percent voting power.
This offering was not Chen's first time undertaking such a large business venture. In 1999, Chen founded the youth-oriented web portal ChinaRen.com with Stanford classmates Zhou Yunfan and Yang Ning. The website enjoyed a brief period of popularity, but following the dot-com bubble collapse in 2000, the website was acquired by Sohu.com, one of China's leading Internet portals.
In October 2006, Oak Pacific used the money it had left to acquire the social network platform Xiaonei for $2 million. The website was later combined with Oak Pacific's 5Q to create the Renren Network, making the firm the second-largest operator of social networking websites in China behind QQ creator Tencent Holdings.
Sticker shock
Renren shares are quite expensive considering its finances. The company pulled in $76.5 million in revenue last year and made operating profits of $7.7 million. Its $7.5 billion valuation gives the stock a price-to-sales ratio of almost 100 – more than four times Qihoo 360's – and an astronomical market-cap-to-operating-profit ratio of 974. By comparison, the ratios of most U.S.-listed tech firms are much lower. Google, for instance, has price-to-revenue and market-cap-to-operating-profit ratios of about 6 and 16 respectively. Facebook, perhaps Renren's closest Western analogue, was valued at $65 billion by institutional shareholders at the end of March, giving it a price-to-sales ratio of about 32.
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