AsiaInfo: The IPO Decision

Introduction
Edward Tian is the founder and CEO of AsiaInfo. In January 19, 1999 he was driving home
from Beijing City Airport. As he drove, he reflected on the company he and James Ding (Co-
founder) had started only six years earlier. AsiaInfo is basically a Chinese company in
Beijing, was a system integrator. It worked for large clients like national phone company,
China telecom and assembled standard components including Sun servers, Cisco routers and
internet networks. The company build over 70% of the entire internet network in the nation.
With government reform moving across the country, internet was booming. Number of
internet accounts grown from 670,000 to 2.1 million in 1997-98. Revenues increased from
$1.2 million to $44 million. Over the same period employee grew from 17 to 450. Recently
several investment bankers had approached to Tian about listing a portion of AsiaInfo’s
equity. So he hired a chief financial officer and chief operating officer.

Background of China
China is the most populous country. It had been ruled by imperial emperors who closed
China off. The ruling was over thrown in 1911 by Mao Zedong. Under his rule, all
enterprises were state owned. As Mao died in 1976, Deng Xiaoping emerged as China’s next
leader. At that time political condition was stable but economy was weak relative to other
Asian countries. Then it experienced a remarkable growth on telecommunications, the press
and information exchange.
About 60% of the population lived below the international poverty line. Then Deng took a
series of economic reforms designed to stimulate the economy by encouraging agricultural
development, liberalizing trade and allowing foreign investment. The rural income grew by
17%. By 1996 output of non-private firms had declined 100% to 67.9% while private
enterprises were blossoming. In 1998, the situation improved dramatically. According to
World Bank, if China’s 31 provinces had been counted as separate economies, 20 of the
world’s 30 fastest growing economies. Entrepreneurship was not yet a well-established
model. Much of China’s growth had been fuelled by smaller firms. Developing the
communications infrastructure was also a priority of Chinese government. The number of
telephone lines grew from 6.9 million to 54.9 million in 1990 to 1996. Internet seemed a key
part of the modern economy but the flow of information was harder to control.

The Internet in China

China telecom was the first company that build and opened the network. By 1995, China Net
(the official name of the network) was running. In the first year, it gathered 2, 00,000 users.
By 1998, the figure was 2.1 million. Customers paid prices that were similar to US, however
the incomes in China averaged 5% of those in US. China Net offered roaming services
whereby users could dial 163 from any phone to access their internet account. China Net also
offered 162 service where customers could dial 162 from any phone to access internet
without any pre-established internet account.

The Founding of AsiaInfo

Tian was born in China in 1962. After he finished his University studies in Ecology in 1985,
he attended graduate school in the US. There he was introduced western ideas and values
through foreign academics. He also had an entrepreneurial experience. In 1988, he developed
a network of Chinese graduate students studying in the US. There he met James Ding. In
1993, they decided to found a company. They knew a wealthy person named James Lau who
made his money in Real Estate. He provided $5, 00,000 in financing and encouraged them to
return to China. Then they founded AsiaInfo and started putting out a newsletter. They
focused on providing business information on Asia. They had translators reading 120 Asian
newspapers. In 1994, they had 8000 clients including Dow Jones and Routers.

Testing the water in China

Ding, the cofounder, started recalling the early research into China. In 1994, he began to talk
with the people of China. They were talking to certain provinces as well as talking to China
telecom. When one or two provinces began to commit to them to build the network, the
national people also started to move on.

Taking the plunge

In 1994, China telecom decided to initiate a pilot project for an internet service offering. So
AsiaInfo competed and won a subcontract to develop a portion of china net pilot project. And
this convinced Ding & Tian to enter Chinese market. But after returning to China they faced
some challenges. It was difficult for them to get the paperwork to import computer
equipment. They also didn’t know how to register so, they hired an agent to do this but he ran
off with the fee that they paid him. There could be no internet in China without network so
they can be a system integrator. By this point, they started talking to China telecom. They
also formed a joint venture with a company called “PTIC”, a state owned company that built
telephone switches for China telecom. Together they started giving proposals to China
telecom to build various pieces of network. But this was also a failure so in 1998 they closed
down this line of business and moved people to the core systems integration business.

Facing management challenges

Neither Tian nor Ding had formal training in management. When the company to 200 people,
more things were out of control for them. During 1997, it became worse and worse. They
were unable to get everyone together. Actually the main problem was people of China didn’t
understand business on that time.

Hiring professional managers

In 1998, Tian hired Yin Han, the former CFO of Hewlett-Packard in China. After that, he
hired Frank Yong, formerly deputy general manager of Northern telecom to be an AsiaInfo’s
COO. They observed that The Company earned a lot of revenue but there was additional
expense lines. There was poor integration of the functional areas. Projects and departments
had no real budgetary control. However they sold their first contract to the Shenzhen stock
exchange in 1995 but it was difficult. Because they were not registered as Chinese company
and so law prohibited to sign a contract without the approval of the government. Also in
China, money is not allowed to flow from a commercial account to personal account. So, they
had to do this deal by Handshake and workout the paperwork later. They completed the
network in less than six months for $1 million. In November 1995, they won the bid to
construct the first phase of China Net. In 1996, company won 17 major system integration
projects which is approximately 70% of the internet network buildout in China.

Expanding Beyond Systems Integration

From 1995 to 1997, AsiaInfo operated as a system integrator. In 1997, the company began
developing its own “system software”. This were designed to handle many of the basic tasks
of running any network such as billing customers, monitoring network performance etc. in
the early 1996, the company started an intranet division for larger corporate customers. But it
was a huge opportunity in US, not in China. So the business was a money losing proposition.

Getting the right culture

AsiaInfo was evolving toward a more western-style company. So, Tian was concerned about
establishing the right culture. People who work in China were trained in bureaucracies. So,
Tian was worried that they also would become like government enterprise. There was also
another culture rather than bureaucratic one, it was military culture. But neither of these
culture will work in technology based business. Frank Yong,s background is much more
western management system. So, he and Tian always had a lengthy conversations regarding
their budgetary systems. However they were also trying to leverage their cultural heritage.

Raising Outside Capital

In 1997, Tian began to think about raising capital. The reason was not only to make capital
growth but also to buyout AsiaInfo’s joint venture partners. He believed that outside board
members would be helpful in strengthening the management team.
Venture Capital Funding:
As Tian didn’t know how to raise capital so he hired a consultant named Bo-Feng, a young
investment banker from Hong-Kong. This was completely a new experience for Tian. Tian
did eight presentations in Hong-Kong within two days. There he met with a variety of
investors such as Europeans, private Hong-Kong family money, US high-tech companies etc.
At the end of the process, all of them wanted to invest but the best chemistry was with US
investors. Potential investors submitted bids but they didn’t take highest ones cause Tian
wanted people from whom he can add value for his company. So they only chose three
companies such as Warburg Pincus, Fidelity and China vest.
Possible IPO:
Investment bankers from Morgan Stanley had visited the company in Beijing and made the
arguments that AsiaInfo could go public.
 Meeting with the Executive Team
While parking his car, he thought about the imminent meeting with his cofounder and
recently hired CFO & COO to discuss about a possible IPO. Several questions came to his
mind such as,
 Did AsiaInfo really need the money?
 Was this the right time to enter Capital market?
 Was the appropriate management team in place to go public?
 Would IPO impact on company’s culture?
 Would the managers “cash out” when they could sell their stock?
 What process & systems would investors look?
 Would the public shares influence AsiaInfo’s ability to attract and retain talented
employees?
And as he parked the car, Tian knew that he and his management team has lot to discuss
about their company’s growth.