After three years of maneuvering, 360 is finally listing at home — so what became of the 30-odd companies that rushed to delist and come back two years ago?

Three years, 27 billion yuan, and a missed tech boom in the US market. Now 360 wants to talk about "national interest."

360 is back after all.

On November 6, at an asset-restructuring briefing held by the elevator maker Jiangnan Jiajie, Zhou Hongyi laid out Qihoo 360's industry conditions, business operations and development plans. Through the whole nearly 16-minute presentation, his eyes never left the script in his hands.

Four days earlier, the A-share-listed Jiangnan Jiajie Elevator Company had issued 26 announcements disclosing an asset swap and a share issue to buy 100% of 360's equity. That is how 360 turned itself into an A-share company by buying a shell. It is now waiting for the China Securities Regulatory Commission (CSRC) to sign off.

Reverse mergers have typically taken three to six months to clear approval. Counting from Zhou Hongyi's internal letter announcing the delisting to the planned listing in the first half of next year, the round trip will have taken nearly three years.

In the words of Zhou Hongyi's own newly published autobiography, this was "yet another gamble with an uncertain future in his career."

The privatization was indeed expensive — not just three years, but more than 27 billion yuan in cash and stock handed over.

A lot changed in three years.

When 360 delisted in 2015, Zhou Hongyi's reason was that the share price was too low: "360's current market cap of $8 billion does not fully reflect the company's value."

As planned, 360 will go public through the reverse merger at a valuation of 50.4 billion yuan — nearly 15 billion yuan less than the 64.6 billion yuan ($9.3 billion) it was worth when it delisted. Given the usual run of ten straight limit-up days for a newly listed stock, 360's market cap should soon pass where it stood at delisting. But over these three years, 360 also missed the surge in Nasdaq tech stocks.

Around the time 360 delisted, Weibo was worth about $5.8 billion, far less than 360. Two years on, Weibo's market cap has more than quadrupled.

China changed too. The Strategic Emerging Industries Board, meant to launch in 2016, was scrapped in the end. Had that new board arrived as promised, 360 would not have needed to merge into an elevator company to go public.

And the A-share market is no longer as feverish as in 2015 — the Shanghai Composite Index is only about 60% of what it was then.

Like 360, more than 30 companies hurried to delist in the US and list back home. Nearly all of them caught the upside on neither end.

In 2015, the Strategic Emerging Board and the stock bubble looked like a new opportunity

Alibaba, which listed in the US in 2014, raised $21.8 billion and was worth more than $23 billion, still the largest IPO in the world.

But Alibaba could not have listed in China at the time, because its founding team held voting rights several times larger than its shareholding. That is a common arrangement at internet startups, protecting the founders' control through rounds of heavy fundraising, and Facebook and Google in the US do the same. Under CSRC rules, however, A-share-listed companies must follow the principle of "same share, same rights."

At the same time, the main board of the A-share market demanded three consecutive profitable years, which shut out nearly every Chinese internet company.

The same year Alibaba listed on the NYSE, the Shanghai Stock Exchange announced plans for a Strategic Emerging Industries Board.

Preparations began in 2015. The board limited which kinds of companies could apply and set a growth requirement, but it dropped the main board's demand that a company turn a profit before it could join the listing queue.

Hu Ruyin, chief economist of the Shanghai Stock Exchange, gave two reasons for it. First, too many internet companies in big data, information security and similar fields had listed abroad or planned to; the board was built to stop that. Second, it would give Chinese companies already listed overseas a way back.

The stock bubble was the other factor. From July 2014 on, the major indexes closed in the green day after day. Over 2014 as a whole, the Shanghai Composite rose 52.87%, the Shenzhen Component 35.61%, and the ChiNext 12.82%.

By 2015 everyone was talking about stocks. Turnover on the Shanghai Stock Exchange once topped one trillion yuan and overloaded the exchange's systems. Baofeng Technology, which had tried and failed to list in the US, turned to the A-share market in 2015; its share price shot from 7 yuan to a high of 327 yuan, at one point trading at more than a thousand times earnings. LeEco was briefly worth more than 100 billion yuan in May 2015.

This looked like a new opportunity.

Earlier still, Focus Media and Giant Network had delisted from the US in 2012 and 2014 and reverse-merged into Hedy Holding and Century Cruises, running up 7 and 20 straight limit-up days respectively and multiplying their domestic market caps several times over.

The first batch of companies disclosed in December 2015 as meeting the Strategic Emerging Board's standards numbered 380, including 360 and iQiyi.

In the privatization plan 360 put forward at the end of 2015, it said plainly that listing back home would mean either a reverse merger or the Strategic Emerging Board.

According to a Tencent Tech report, Momo — listed in the US for less than a year — wrote into its 2015 privatization plan that after coming home it would list on the Strategic Emerging Board or ChiNext in 2017.

E-House China, the property company that announced its privatization in June 2015, had CEO Zhou Xin say outright that China's capital market held a certain appeal, while talking to US investors took too long, left the company misunderstood, and held its valuation down.

iQiyi, rumored again and again over the past two years to be going public, had originally planned to list on the Strategic Emerging Board.

In February 2016, Baidu announced that Robin Li and iQiyi CEO Gong Yu would acquire roughly 100% of iQiyi's equity.

In an internal email at the time, Gong Yu said that once iQiyi was carved out of Baidu it would seek a domestic listing when the moment was right. The domestic opportunity he meant was the Strategic Emerging Board.

In the year between the start of preparations in early 2015 and the board's abandonment in March 2016, more than 30 US-listed companies — among them 360, Perfect World, Bona Film Group, Momo and Jumei — launched privatization offers, more than the previous four years combined.

Privatizing and then relisting on the A-share market costs a staggering amount. 360 spent more than 27 billion yuan

To "privatize" a listed company is, in essence, for the controlling shareholder to buy out every other shareholder's stake at a premium — delisting on purpose.

When the controlling shareholder is in a hurry to buy, he has to pay more.

360's 2015 privatization offer valued the company at $9.3 billion, a 16.6% premium to that day's close — an extra $1.54 billion, or about 10.2 billion yuan.

Zhou Hongyi could not put up that much money himself, and would not have. He brought in a consortium of 38 firms, including Sequoia Capital, China Construction Bank, Ping An Insurance and CITIC, to finish the privatization.

In return, consortium members would hold stakes of between 0.1% and 2.75% in 360 once it listed.

At the 50.4 billion yuan valuation in the reverse merger, the shares held by the consortium that paid for the privatization (leaving aside 360 and its affiliates) are worth 11 billion yuan.

On top of that, 360 borrowed $3.1 billion from China Merchants Bank to fund the whole privatization-and-relisting process, running up about $51.15 million, or 345 million yuan, in interest along the way. It paid the loan off this May.

Finally, 360 had to choose between an IPO and a reverse merger.

The first is cheaper but slow; the second means paying a "shell fee" but gets you listed fast.

Companies planning an IPO wait for CSRC review in the order they filed their prospectuses, usually about two years. If the CSRC suspends IPOs altogether, or suspends them for one type of company, the wait becomes impossible to measure.

China's stock market has suspended IPOs nine times since it was founded, for stretches of three to fifteen months.

Since 2010 the CSRC has refused to accept, or has closely scrutinized, IPO applications from property developers, and no property company has listed in nearly seven years; Guangzhou R&F Properties has abandoned its A-share IPO five times, and Wanda, 15 months after filing its prospectus, still sits 51st in the queue.

360 must have planned on an IPO at first. In March this year it signed an IPO tutoring agreement with Huatai United Securities, and Zhou Hongyi twice denied in public afterward that the company would buy a shell. But later, perhaps pushed by the privatization consortium and by the need for money, it took the reverse-merger route.

A reverse merger is a form of reverse takeover.

On paper, in terms of who is buying whom, it is the "shell company" Jiangnan Jiajie that acquires 360. But in practice, Jiangnan Jiajie's original shareholders first handed all their shares to a third party, and the company then issued new shares to 360 as payment for the acquisition.

So once the deal closes, the 360 side holds 100% of the listed company Jiangnan Jiajie. Zhou Hongyi and his affiliates hold more than 50% of the restructured company, making him its controlling shareholder — and 360 is listed.

The price of the shell was that Zhou Hongyi transferred 169 million yuan of the original listed company's assets to its old shareholders, then, through a string of complicated asset swaps, left those shareholders with 5.88% of the restructured company, worth about 3 billion yuan. After six straight limit-up days, that stake was worth 5.3 billion yuan.

All told, 360 has paid at least about 27 billion yuan to privatize and return to the A-share market.

The companies that listed in the US have come back to the capital market they once avoided

Unlike most Chinese internet companies that listed in the US, 360 was solidly profitable when it went public.

On its numbers it could have joined the A-share queue as early as 2012. At a rate of roughly 200 listings a year, it would have been public at home by 2014.

But 360 had good reasons not to list on the A-share market then. It was not, after all, a normal capital market.

What kept 360 out of the domestic market was the same-share-same-rights rule and the risk of an IPO suspension. Before 360 listed in 2011, there had already been seven suspensions, the most recent lasting eight months across 2008 and 2009. Roughly speaking, any sharp fall in prices stopped IPOs, and with fewer things left to invest in, prices swung harder still.

This was never a normal market, so no one can blame a company for steering clear of it.

Nothing fundamental has changed about it. After the crash of July 2015, IPOs were suspended for a while too.

But whether it was the Strategic Emerging Board or the bubble of the moment, the companies that had chosen to avoid this market came charging back.

Two-thirds of them finished privatizing, but only 6 are still on the road to a listing

By QDaily's count, leaving aside companies that were acquired, more than 35.5% of the companies that announced privatizations in 2015 have since announced they were calling them off.

Eleven companies, among them iQiyi, Momo, JOYY and Jumei, ended their privatization processes.

Some, like iQiyi, stopped because shareholders were unhappy with the buyout price.

More stopped because the A-share market fell and the Strategic Emerging Board vanished.

That board was to have launched in July 2016. But on March 14 that year, the fourth session of the National People's Congress revised the draft outline of the 13th Five-Year Plan and struck out the line about "establishing a Strategic Emerging Industries Board."

Chinese companies listed overseas that had been counting on it suddenly had no channel, and were left with the old ones: queue for an A-share IPO, or buy a shell.

The CSRC also said it was watching closely the obvious valuation gap between domestic and overseas markets, and the speculation in shell companies. In May 2016 there were reports that it would "hold off on the return of overseas-listed Chinese companies."

They were not held off, but listing through a restructuring got harder.

In 2016, the CSRC tightened the tests for what counts as a "change of control" at a listed company, cancelled the supporting financing that came with restructuring listings, lengthened lock-up periods for new shareholders and cracked down on intermediaries — far stricter rules than before.

They took effect that September. According to a China.org.cn report, 123 A-share restructurings had failed by the end of the year.

Jumei proposed a $7 privatization price in February 2016; its shares have fallen since and now hover around $3.

Even finishing a privatization guarantees nothing.

Winner Medical, the parent company of Purcotton, delisted from the US in 2012 and spent five years trying to get back onto the A-share market, without success.

On November 3, the CSRC turned down Winner Medical's IPO application again, citing repeated environmental fines and too many accounting errors, among other problems.

After all that back and forth, most of these companies were too late for the A-share frenzy and too early to catch the US rally that followed Trump's election.

The newly relisted 360 has found a new opportunity: "national interest"

Against the backdrop of the domestic market in 2015, Zhou Hongyi argued that 360's value was being underestimated in the US. His internal letter stressed that the company's revenue and profit had grown every year from 2010 to 2015.

But the stock market looks forward. By 2015 the mobile internet era had arrived, and smartphone users already made up 90% of the country's internet population.

On phones, 360 leaned mainly on its app store and its security center. By 2015, though, Baidu — by buying 91 Wireless — and Tencent — by bundling installs with WeChat — had both passed 360 to become the two largest Android app stores.

Meanwhile, as competition among handset makers sharpened, more than 80% of the market ended up with the six biggest companies, and every one of them built its own app store and security center. In the three months from July to September 2015, just as 360 was preparing to delist, ad prices in OPPO's app store doubled or tripled depending on the slot.

Handset makers now had the scale, and every reason, to keep app stores for themselves. Their own store came preinstalled, so users no longer needed to download anyone else's.

Three years later, the doubts about 360's core business have not been resolved at all.

The phone market has grown more concentrated still. Apple, Huawei, OPPO and vivo alone hold 78% of it; add Xiaomi and it is 86%. Every other company fights over the remaining 14%. Apart from Tencent's Yingyongbao, which rides on WeChat and its other apps, every third-party app store is shrinking.

360 started making its own phones in 2015, but its share has never passed 1%. In any report it is either lumped into "others" or flattened into a line along the bottom:

With the listing back home, 360's story is no longer the consumer business it told in the US. It is "national interest."

At the China Internet Security Conference this September, Zhou Hongyi said the state would spend enormously on cybersecurity, that a service industry would rise with it, and that the domestic security market would have room for explosive growth over the next five years.

"This industry is special. Chinese company, Russian company, American company — once a cybersecurity firm gets big, it has to stay aligned with national interest." That is what Zhou Hongyi told reporters at the press conference.

Plenty of people will buy that story. Hikvision, founded in 2001 and in the business of government video surveillance, has gone from a market cap of 240 billion yuan in 2015 to more than 380 billion yuan today — 50% above even the peak of the bubble.

What happens next, of course, is anyone's guess. Wang Jianlin said much the same thing two years ago: "Doing business in a country like China, I don't think you can get away from the government."

Cover image: thebalance