Chinese social networking firms eye U.S. IPO gold: sources

SHANGHAI (Reuters) – One of China's largest social networking companies, Oak Pacific Interactive, has hired investment banks for an initial public offering in the United States next year, the first in a rush of Chinese Facebook clones looking to list.

Oak Pacific Interactive (OPI) has hired Credit Suisse Group AG and Deutsche Bank AG to underwrite its IPO slated for the first half of next year, sources close to the matter told Reuters on Friday.

The firm owns China's largest online social networking site Renren and Nuomi, similar to the popular U.S. website Groupon featuring daily deals and entertainment community Mop.

TaoMee, a social networking site for children, was also planning to list late next year and would conduct its "beauty parade" for investment banks in the first quarter of 2011, said a source familiar with the situation.

Social networking site Kaixin001 also plans to list but has not gone through the process of selecting banks, said the source, who declined to be named as the matter was not public.

"The question is whether these companies are really going to become the Facebook of China," said Paul Wuh, a Hong Kong-based analyst with Samsung Securities.

"How they are going to monetize: through advertising or through gaming, that's the question, which one will be the most successful will depend on the business model they choose," said Wuh.

OPI's Renren website is similar to Facebook as it allows users to share locations with friends, "like" something and post updates. Renren has about 100 million registered users.

Kaixin001 posted revenue of just over $10 million last year and the company expects 2010 revenues of up to three times that level, the firm's chief executive Cheng Binghao told Reuters in October.

Profits for Kaixin001 are also growing quickly, tripling to about 30 million yuan in the third quarter from 10 million in the second, Cheng said.

Chinese IPOs in the United States have hit a record high of 35 this year. Based on the number of offerings, Chinese issuers account for 23 percent of U.S. market IPO activity, up from 1 percent in 2000, according to Thomson Reuters data.

More than half of this year's Chinese IPOs in the United States come from high technology, consumer products, industrials and retail sectors.

The Chinese social networking firms will be following in the footsteps of online video site operator Youku and online retailer Dangdang, which saw their stocks soar in this week's debuts.

Youku's triple-digit first-day pop was the biggest since 2005, when Baidu Inc rose 354 percent, data from the New York Stock Exchange showed.

A source said the amount to be raised by OPI had not been finalized. OPI and the banks declined to comment.

RISKS

Social networking sites have grown in popularity in China in recent years, garnering most of their revenue from online advertising. They also benefit from an ecosystem closed to major foreign competition. Facebook and Twitter are banned in China.

But the market is increasingly competitive with more than 100 social networking sites operating. Two social networking sites shut earlier this year due to cash flow issues, local media reported.

The industry is also fraught with regulatory and legal risks as China seeks to control the flow of information online.

"As long as they conduct their self censorship well, there shouldn't be any problems," said an analyst with a major European investment bank, who declined to be named given the sensitivity of the matter.

Analysts also said the IPOs were more of a way to provide an exit to the venture capital firms who have backed these firms and to provide incentive to their workers.

"A lot of these Chinese Internet companies are net cash, they don't need to list for funding purposes," said Wuh of Samsung Securities.

China is the world's largest Internet market by users at 420 million. About half of them use social networking sites, government data showed. (Editing by Jacqueline Wong and Muralikumar Anantharaman)

Winklevosses' Legal Lobs Won't Leave Much Egg on Facebook

If it turns out that Facebook CEO Mark Zuckerberg did misrepresent the true value of his company when negotiating a settlement with the Winklevoss twins three years ago, the fallout is likely to be minor. The court could take another look at the terms of the settlement, but any criminal charges of securities fraud are unlikely in the extreme. As for Facebook's reputation, this incident will likely be one it can easily shrug off.

A long-simmering legal dispute between Facebook CEO Mark Zuckerberg and two former Harvard University classmates is back in the public eye after partially redacted court documents filed this summer in the U.S. Court of Appeals for the Ninth Circuit Court surfaced on Radar Online.com.

The documents, which apparently were leaked to the site, were filed by Facebook's legal representatives in response to the former classmates' attempts to overturn a settlement they made with Zuckerberg three years ago.

The dispute between identical twins Cameron and Tyler Winklevoss and Zuckerberg was the basis for the movie "The Social Network," released earlier this year. Facebook has denounced the portrayal of events in the film as inaccurate.

Briefly, the dispute originated in 2003 when the Winklevosses hired Zuckerberg to code a social networking site called the "Harvard Connection." The twins later settled their claims with Zuckerberg in 2008 for US$68 million and Facebook stock.

Now, they are alleging that Zuckerberg was deceptive when during agreement negotiations, hiding the true value of Facebook.

A Securities Issue

Essentially, the twins are accusing Facebook of securities fraud. According to their reasoning, Facebook owed them -- as would-be shareholders -- complete disclosure of any information that would have aided them in calculating the company's value at that time.

It is difficult to gauge how much is at stake for Facebook and its accusers based on these gleanings. Possible outcomes include an overturn of the settlement agreement and resumption of the original litigation, as well as criminal charges.

However, the most extreme scenarios are far-fetched, according to James Fanto, a professor at Brooklyn Law School and a securities expert.

"There is almost no possibility of criminal charges here, and the securities fraud claim is probably a reach as well," he told the E-Commerce Times.

The worst-case scenario he views as a possibility is a determination by the court to revisit the settlement if it believes it was reached through fraud.

Reputational Risk

The risk to Facebook's reputation is also minor, even if the company does go public eventually. In that situation, the Winklevoss case would point to a lack of respect on the part of Facebook when dealing with potential shareholders.

Even that is a stretch, however, said Christopher M. Collins, a partner with Vanderpool, Frostick & Nishanian.

"Any time there is a lawsuit, there is a cloud on a company," Collins told the E-Commerce Times. "But it is pushing it to say that these accusations would represent how Facebook would treat its shareholders."