One of Hong Kong’s largest, and most enduring business institutions has been laid low by a reckless brat from one of Hong Kong’s most powerful families. About a year ago, Richard Li acquired Hong Kong Telecom, and proceeded to destroy over US$20 billion of Hong Kong Telecom’s stock market value. Since its acquisition, its shares have declined 85%, falling to values not seen since 1991. Ten years of corporate progress have been destroyed by an incompetent, but very well-connected, college dropout.
Before Richard Li came along, Hong Kong Telecom (HKT) was majority-owned by the U.K. telecom giant Cable and Wireless. Its English-ownership was a liability, given Hong Kong’s reversion to the Chinese “motherland” in 1997, and it faced several challenges. HKT had its license renewal coming up in 2006, and for years, its expansion efforts to enter China had run against a brick wall. While there was never outright obvious discrimination against HKT, it was obvious to analysts that the industry environment was less welcoming to this “colonial” power. Nevertheless, HKT managed to rack up slow but steady sales and profit growth over the decades. In 1991 net income was HK$5bn (US$640mn), which grew to HK$11.5bn (US$1.5bn) in 1999.
Young Richard Li followed a less steady track. In 1987, Mr. Li, youngest son of Hong Kong’s wealthiest and most powerful tycoons, Li Ka-shing, graduated from Stanford University with a degree in computer or electrical engineering — so we’re told. He then dabbled in stocks in Canada until 1990. Then, financed by his father’s company, Hutchison Whampoa, he started an Asian television network called Star-TV. Star TV was losing money and going over budget, but Richard Li extricated himself from the situation by selling Star to media mogul Rupert Murdoch in 1993. He rolled the profits into Pacific Century Development, an investment holding company. Over the next few years, Richard did little to distinguish himself in business, most notably making a big, unprofitable investment in Tokyo real estate, necessitating financial aid from his father’s company.
In 1996, Richard Li listed his company on the H.K. stock exchange as Pacific Century Group. What followed were mostly operating losses, and by early 1999, the stock was below its listing price. What happened next stunned all of Hong Kong. In early 1999, Richard Li changed his company’s name to Pacific Century CyberWorks (PCCW) — making empty but trendy promises to build a broadband network for Asia. Next, Richard Li had a chat with Hong Kong’s Beijing-appointed Governor, after which it was announced that a huge plot of Hong Kong’s choicest land would be handed over to PCCW to build a “hi-tech” residential and commercial property development.
Naturally, this would mean multi-billion dollar profits in a city where an 1,000 sq. ft. apartment can sell for US$1,000,000. Many people cried “crony-capitalism”, as this was the first time a developer acquired land without it being put up on an expensive public bid. Investors saw that the fix was in, that Richard Li had unique political pull, and so PCCW shares surged. More good news followed, as PCCW began to profit from a run-up of some of its Internet investments in the U.S. The media began to hype Richard Li’s promise to build an Internet “Network of the World.”
In early 2000, Singapore Telecom made an offer to acquire HKT from Cable and Wireless. The combination appeared to offer some operational synergy, but immediately, voices spoke out against merely replacing a British owner with a Singaporean one. Enter the savior of Chinese pride, young Richard Li. In a matter of days, PCCW, which had never in fact begun to operate its promised internet network, and which possessed few assets other than a basket of Internet stocks, put together a bid to take over HKT.
The acquisition would be financed primarily through the issuance of overvalued PCCW stock, combined with over US$11 billion of syndicated bank borrowing. What kind of bank would loan billions to a company with few assets and no telecommunications experience or operating capability? Tellingly, the largest, multi-billion portion came from the Beijing-controlled Bank of China, signaling that China’s leaders supported this deal. Singapore Telecom withdrew its bid, and Cable and Wireless soon accepted PCCW’s bid.
From the bid’s beginning, Richard Li offered little in terms of a business plan. Generalities were stated about merging the “broadband internet” with HKT’s telecommunications business, but considering that PCCW had still not delivered any products itself, all Richard Li could promise was “a very sophisticated business plan within two weeks” of completing the merger.
Following the merger, HKT was absorbed by PCCW, and its business plan has not been “sophisticated” at all. The merged company has been burdened by the massive debt incurred by the takeover. To help pay its interest, PCCW raised residential telephone charges 22% – not exactly making it easier for customers to access the Internet. Yet many complain that service quality has declined. On March 28, PCCW announced a loss of HK$886 million (US$114 million), as loss-making Internet investments and high interest charges dragged the telephone operations down. Little Richard Li was not man enough to attend the news conference in which the results were announced. We can understand why he wouldn’t want to answer the media’s questions. Perhaps he was embarrassed and angry at the media for recently publishing stories exposing the fact that he dropped out of Stanford without completing a degree — yet represented himself for years in stock-exchange filings as a holder of degrees in electrical engineering and computer engineering.
Richard Li may well go down in history as one of Hong Kong’s great economic destroyers. Some feared that Hong Kong would be destroyed by Chinese tanks plowing through Central. Instead, it’s being torn down by an immature playboy with connections in Beijing and the Governor’s mansion, who’d rather attend parties than complete his studies, who’d rather “make deals” than competently operate companies.
To quote Ayn Rand’s novel “Atlas Shrugged,” Richard Li’s emergence represents Hong Kong’s gradual replacement of its healthy corporate and legal culture, an “aristocracy of money” (honestly made,) with a poisonous “aristocracy of pull.” “…When you see that money is flowing to those who deal not in goods, but in favors-when you see that men get richer by graft and by pull than by work…you may know that your society is doomed.”