Dial M for Merger

What does it take for a 33-year old to wake up one morning and decide to buy the phone company? An eye for the big deal, certainly. Hong Kong's Richard Li, who made his first billion before his 29th birthday, has already proven he has that. His pedigree doesn't hurt, either: father Li Ka-shing is one of Asia's mightiest business barons, a major player in the Hong Kong telecommunications industry and a man who seldom gets the short end of a deal.But that's only half the story behind last week's attempt by Li the Younger to take over Cable & Wireless HKT, once the territory's monopoly phone company. Li wants to be Asia's biggest Internet tycoon, and the vehicle he's using is his Pacific Century CyberWorks. The company's principal assets consist of widely scattered investments, mostly in high-tech companies. Revenues are a bare trickle, and operating profit a distant dream. Though CyberWorks is a public company, it has never published a proper annual report--because it has only been listed for 10 months.
But dotcom mania, buoyant in Asia as in the U.S., has boosted CyberWorks' market capitalization to $33 billion, making it larger on paper than, for example, online giant Amazon. Through CyberWorks, Li wants to grab HKT's assets, which include local telephone lines and sexier services such as broadband Internet access in Hong Kong and a satellite joint venture with Rupert Murdoch's Star TV, as well as Internet provider licenses in eight Asian cities other than Hong Kong.

Another recent megadeal, AOL's planned union with Time Warner (parent company of this magazine) clearly registered with Li, who has a computer engineering degree from Stanford University. The lesson: a towering stock price, not a war-chest or generous bankers, gets the merger and acquisition folks beavering these days. Only in Hong Kong, marvels a local investment banker. This is a city that grabs hold of trends like I have never seen.

If international trends favor Li, so too does his nationality. In recent months, HKT has also been wooed by Singapore Telecommunications, the former telecoms monopoly in the Lion City. SingTel is proposing a more traditional merger of two phone companies facing increasing competition in an era of deregulation. The problem was that the Singapore government owns 79% of SingTel, and some Hong Kong legislators worried about a foreign government's control over a key service. Rumor has it that China is concerned as well, though Beijing has kept a consistent silence and Hong Kong's government has officially denied any pressure from the mainland. Li's bid was soothingly hometown, though it raised concerns of a different sort. If Li gains control of HKT, he and his father will command practically all of Hong Kong's local telephone service and 60% of its cellular business--on top of the elder Li's vast real estate holdings, his control of Hong Kong's largest supermarket chain and Hong Kong Electric, one of the city's two power companies.

To deflect those worries, the normally retiring elder Li pronounced last week: I have no ambition, but only a loving heart for Hong Kong. In fact, the former British colony doesn't have a particularly strong aversion to oligarchy of any form. Hong Kong is a free market and does not have antitrust laws, says Sin Chung-kai, a local legislator. If I had to choose, I'd prefer CyberWorks to SingTel. Aside from local pride, there are other reasons to doubt the SingTel deal. That was two elephants lumbering into one another, says William Lo, a former HKT executive who now heads an Internet company. They were two former monopolies with exactly the same problems. At least with CyberWorks there's some synergy.

By week's end, the negotiations were still shrouded in secrecy, although CyberWorks was known to have amassed at least $1 billion in cash through a spur-of-the-moment stock placement. Nonetheless HKT's market capitalization last week was $39 billion, and that suggests that HKT shareholders will be offered quite a lot of CyberWorks scrip if the deal comes through. (More than 50% of HKT is owned by London-based Cable & Wireless PLC.) Whether Li and his young band can manage a company with annual revenues of more than $30 billion is an interesting question. Their investment team runs around like chickens with their heads cut off, says a Hong Kong-based venture capitalist. And they use the putty strategy of investment: throw enough against the wall and something's bound to stick. Some analysts predict Li would eviscerate HKT, taking the jazzy, broadband services and the tie-up with Star TV while selling the local phone business and possibly its cellular operation. Too Old Economy for Li, who made his business debut by founding Star TV in 1990 and selling it to Murdoch for $950 million a few years later. Now he wants back into the game--in a big way.