China's Internet companies have been pumping cash into U.S. tech start-ups, riding the latest wave of hyper growth and soaring valuations.
Now, one of those Chinese investors finds itself at the center of a heated cross-border financial dispute.
Renren, a struggling social network that trades on the Nasdaq and was once dubbed the "Facebook of China," received a $1.4 billion offer by the company's top two executives in June to take it private.
Not so fast, says a group of Renren shareholders.
They claim that the proposal dramatically undervalues Renren's stakes in U.S. start-ups, namely its 25 percent ownership of online lender SoFi, which is said to be raising money at valuation of about $3 billion.
"It's a total low-ball offer," said John Romero, founder of Aptus Capital in Birmingham, Alabama, who wrote a letter to the Renren board on July 24, calling the deal "offensive and ludicrous." Romero owns the shares personally and was writing as a private investor.
Renren's board plans to form a special committee to consider the proposal. A representative from the Beijing-based company didn't respond to requests for comment.
The shareholder revolt marks one of the first signs of public tension in China's multiyear U.S. spending spree that's seen Alibaba, Tencent, Renren and others bet big on promising Internet start-ups including Snapchat, Lyft and Kabam. Renren founder and CEO Joseph Chen has been particularly aggressive in Web finance, with plans to invest $500 million in fintech companies.
However, unlike Alibaba and Tencent, which have come to dominate Chinese Web activity, Renren's Internet business, consisting of games, video, online advertising and finance, has been on a steady decline. The stock is 75 percent below its IPO price for May 2011.
Whatever the performance of the company, Chen has proven himself to be an astute venture capitalist. That's why investors are backing Renren, and why they're so furious about the potential takeover.
Chen and Chief Operating Officer James Jian Liu submitted a nonbinding offer to buy the company for $4.20 per U.S. share on June 10, a 22 percent premium to the stock's average closing price over the prior 30 days and just above where it closed on June 9.
That sounds fine until factoring in the paper value of Renren's start-up investments, which the company doesn't carry on its books.
Based on SoFi's reported valuation for its upcoming round, Renren's stake would be worth up to $738 million. To date, Renren has invested about $92 million in San Francisco-based SoFi, starting in 2012, when the company was a fledgling provider of education loans.
Three years later, SoFi's portfolio has expanded to include mortgages and personal loans and the company recently surpassed $3 billion in loans funded. Chen is on SoFi 's board as is Renren director David Chao, whose venture firm DCM invested in both companies.
On its balance sheet, Renren conservatively accounts for its start-up activity, valuing long-term investments at $578.7 million in the first quarter. It reported another $413 million in cash and short-term investments.
Add it all up, and the $1.4 billion takeover offer pushed Romero into action. In his letter to the board, which he also published publicly via press release, Romero claimed that "Chen and Liu are attempting to capitalize for personal gain solely at the expense of ALL shareholders"
Since penning the letter, Romero said he's received 10 or so e-mails from other incensed Renren investors in the U.S. and Asia.
"People are writing to us pleading with us to help them," he said.
Romero forwarded to CNBC.com an e-mail from one investor, who wrote to say the offer is an "outrageous injustice imposed on us and reflects the greedy and almost immoral disposition of Chen and Liu." Another said Chen "should act like a public company CEO, not a robber baron."
Renren is far from alone in having management pursue a takeover. The Wall Street Journal reported in July that close to 20 Chinese companies that trade in the U.S. received such bids from management teams this year as China's stock market surged. The plan for some was to relist in China at a higher valuation, the Journal reported.
Because the deals are nonbinding, investors can back out if they so choose, a scenario that looks increasingly likely for some after the Shanghai composite index's 28 percent plunge since June 8.
But to Romero, Renren is a unique case because the core social network is losing users and has very little value. Sales tumbled 41 percent in the first quarter as users flocked to Tencent and Weibo. In other words, based on its reported metrics, this is not a company that growth investors would be hungry to buy.
"Renren is effectively a VC-type business, not a real operating business," Romero said.
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Romero is a small investor trying to drum up support. The problem is that Chen owns 48 percent voting control. Only one outside shareholder matters: SoftBank.
The Japanese telecommunications giant owns about 40 percent of the stock and has 43 percent voting control, according to Renren's latest annual report. It also has one of the seven board seats.
Renren's report clearly states that the concentration of control between Chen and SoftBank enables them "to significantly influence matters such as electing directors and approving material mergers, acquisitions or other business combination transactions."
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Incidentally, SoftBank is also a likely investor in SoFi's next funding round, based on a recent Federal Trade Commission filing.
SoftBank hasn't spoken publicly about the Renren proposal or the SoFi deal, and SoftBank representatives didn't respond to requests for comment.
Ian Wyatt, founder of Wyatt Investment Research in Richmond, Vermont, is siding with Romero. He wrote a newsletter to clients a week before the takeover offer recommending Renren shares as a way to invest in SoFi, while also getting access to emerging businesses like Motif and Cheyipai, a Chinese used car site.
At the time of his report, Renren was trading at $4.03, and Wyatt's analysis estimated the stock was worth $5.27 a share.
A buyout price of $4.20 means ordinary investors get shut out from the potential windfall of a SoFi IPO or profitable outcome of any other company in the portfolio, Wyatt said.
SoFi hasn't said when it plans to go public, and a company representative declined to comment for this story.
"Clearly, Renren executives see a lot of value in what they built and see an opportunity to enrich themselves," Wyatt said in an interview. "Average shareholders get burned in that situation."
Wyatt wrote a follow-up report after the offer. "Renren is worth far more than $4.20 per share," he wrote. "The company's executives think the same and are trying to take the company private at a bargain price."
Renren hasn't updated investors since the day of the takeover offer, except last week, when it announced the resignation of acting finance chief Ashley Law Kwok Wai.
Based on the current stock price, there's still plenty of skepticism that the deal gets completed. As of Wednesday's close, Renren was trading at $3.52 a share, 19 percent below the offer price. Part of that is surely due to Chinese stocks getting crushed since mid-June.
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Whether or not Chen and Liu succeed in their takeover effort, Renren has to determine soon if it will participate in the next SoFi funding round. Chen has already invested a big chunk of his allotted fintech money, and keeping his current SoFi ownership would likely mean forking over another $170 million.
That's more than 40 percent of its cash balance. Then again, where better for Renren to spend its cash?
As Romero sees it, "SoFi will be the golden goose for these guys."
Clarification: This story has been updated to say that Romero was writing as a personal investor, not on behalf of Aptus.