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Is Hong Kong’s Superstar Internet IPO “Tom.Com” Made of Smoke and Mirrors?

People in Hong Kong occasionally get a little over-enthusiastic when trying to buy hard-to-get items. When a real estate property is hot, for instance, both homebuyers and gangsters swamp agents with offers to buy. A few years ago, kids, parents, and their maids formed lines hundreds of yards long outside of various McDonald’s restaurants to get their hands on the latest craze – a “collectible” Snoopy toy inside a “happy meal.”

Earlier this year, the enthusiasm was in full force again as hordes descended upon brokerage houses, beating the stuffing out of each other in an attempt to buy into the year’s hottest Hong Kong internet IPO, Tom.Com. Cameras captured chaotic scenes at bank branches where about 300,000 buyers showed up to submit applications for the share sale. In the end, about a fifth of Hong Kong’s 6.97 million people applied for shares. The stock was being offered for HK$ 1.78 per share, and was 670 times oversubscribed. It closed its first day at HK$ 7.75, and seven days later the stock reached a high of HK$ 15.35.

Last week, just five months after Tom.com’s extremely successful IPO, the company announced it had lost $25 million in its latest quarter, and was laying off 16% of its staff (80 employees) to cut costs. After this announcement, the stock fell to HK$ 5.20, 66% off its high, leaving the company valued right around US$2 billion. Of course, I’m no Internet executive or investment banker working for Tom.Com, but I can’t help wondering how a company with insubstantial current operations and grand expansion plans can facilitate rapid growth by reducing employees.

Most investors would admit that they didn’t buy Tom.com based on the expectations of near-term profitability (executives promise no profits until 2003 at the earliest) or operational excellence. Even by the standards of internet companies, Tom doesn’t do all that much – it has a website for a radio station, some not particularly popular sports, travel, and entertainment sites focused on Hong Kong and China, and a few other things.

But Tom.Com has a lot of plans, promising to expand greatly in the future, and is thought a likely acquirer of other websites. These promises have in turn led to dreamy statements from analysts like: “Based on the fact that Tom’s potential market amounts to 22% of the world population, Tom.com would be worth at least 10% of Yahoo!”

The real reason most people bought shares of the company in the first place was the reputation of its founding and largest investors – the most notable being “superman” Li Ka-Shing, Hong Kong’s most successful businessman and owner of two of its largest companies, Cheung Kong and Hutchison Whampoa.

But given the faith that investors seem to have placed in Li Ka-Shing’s management abilities, it’s odd to see that Tom.Com’s “initial management shareholders,” (namely Li Ka-Shing’s companies) now seem unusually eager to reduce their investments in the company. Indeed, prior to listing, the companies asked for and were granted an exceptional exemption by the stock exchange, from the standard “lock-up” period of two years to just six months. As the price of Tom.Com continues to fall from its earlier heights, it seems likely that the following words from Hong Kong gadfly Webb-site.com are on target: “The founding shareholders must be counting the days to when the 6-month lock up expires on 1-Sep-00.”