Sina’s US Stock Market Departure Could Herald Wave of Chinese Delistings

December 27, 2020 Updated: December 29, 2020

News Analysis

Chinese internet firm Sina Corp. agreed to go private and delist from the Nasdaq stock market, 20 years after its landmark U.S. IPO that led to a wave of Chinese companies listing their shares in the United States.

Sina’s decision was crystallized after an entity led by its chairman, Charles Chao, sweetened the acquisition offer to $43.30 a share. New Wave Holdings, the entity making the takeover bid, increased its offer from its initial one in July of $41 a share.

Inglorious End of a Trailblazer

Sina, which was founded in 1998 by a group of software engineers, began as an internet portal.

Sina went public in New York in April 2000 during the dotcom heyday, becoming the first Chinese company to list its shares in the United States. Its initial public offering was quickly followed by Chinese internet giants Sohu.com and NetEase in the same year.

The company was a pioneer, using an unusual structure to get around China’s laws prohibiting foreign ownership of its internet companies. Since Sina’s 2000 IPO, almost all of China’s technology companies followed a similar listing structure, called the variable interest entity (VIE) structure. U.S. investors would buy shares in a Cayman Islands or British Virgin Islands-registered holding company, which then contracted with China-domiciled entities to earn revenue.

This practice was followed in subsequent, more high-profile IPOs such as those of Alibaba, JD.com, and Baidu.

The VIE structure allowed Chinese companies to bypass Beijing rules and enabled entities to raise hundreds of billions of dollars in U.S. capital and hundreds of millions of dollars in fees for U.S. banks and law firms assisting in the IPOs.

Sina’s big break came in 2009 with its launch of Weibo, a Chinese microblogging website similar to Twitter. In the same year, Twitter was banned in China by communist authorities.

After Weibo was taken public on Nasdaq in 2014, the child quickly overshadowed its parent. Weibo’s market capitalization was four times that of Sina, which owns about 45 percent of Weibo.

Over time, Sina’s other ventures, including social media and online finance, have largely languished in the shadows of much bigger rivals; the company itself became something of a Weibo valuation arbitrage play in the eyes of investors.

Weibo has been subject to intense regulatory and censorship pressure. Recently, influencers were forced to leave the platform if their commentary was deemed to be inappropriate by the Chinese communist regime.

More Delistings May Be Ahead

Because of growing scrutiny from U.S. regulators, several Chinese technology firms have delisted from U.S. stock exchanges or turned to other markets to raise capital in 2020. President Donald Trump signed into law a measure that would require foreign companies to adhere to the same accounting and disclosure standards as other public U.S. companies, or face delisting from U.S. exchanges. Companies have three years to comply.

At least a dozen New York-listed Chinese companies have approved take-private deals to delist from the stock market, including a few major names.

Sogou Inc. in July accepted a takeover bid from Tencent Holdings in a $2 billion deal, while China’s biggest classified ads website 58.com Inc. was bought out by a group of private equity firms, including General Atlantic and Warburg Pincus, in a deal that valued the company at close to $9 billion.

Other Chinese technology firms, including JD.com and NetEase, have pursued secondary listings this year in Hong Kong. With the impending U.S. law, and without an accounting and auditing disclosure agreement between China and the United States, Chinese companies could be considering consolidating their publicly traded shares in Hong Kong in the future.

The Chinese Communist Party doesn’t allow U.S. regulators such as the Securities and Exchange Commission (SEC) to perform audit inspections of U.S.-listed Chinese companies. These audit inspections were set up in 2002 to prevent fraud, after high-profile accounting scandals in the early 2000s engulfed companies such as Enron Corp. and MCI WorldCom.

China’s Luckin Coffee is the highest-profile Chinese company to be caught up in a fraud scandal, leading to it being delisted this year from Nasdaq.

Prior to the new law, for almost two decades, Chinese companies have been subject to lower transparency and auditing standards compared to U.S.-listed companies.

“This is China and the Chinese stock promotion, manipulation fraud machine laughing in the face of the SEC,” China short-seller Carson Block told Bloomberg TV in a recent interview.