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Battle for control not over yet
By Pan Xiaoyi |
October 21, 2010, Thursday
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Print Edition
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THE high drama surrounding Chinese electrical retail giant Gome has subsided, well at least for now, after shareholders voted against ousting Chen Xiao as chairman at a special shareholder meeting in Hong Kong on September 28.
The result came as a surprise. Public opinion had been betting on the other side. Chen became chairman at the end of 2008 when Gome founder Huang Guangyu was detained by police on charges of illegal business dealings.
Huang was sentenced to 14 years in prison in May. From behind prison bars, he has been attempting to regain control of what was once the indisputably biggest electrical appliance retailer in China.
Many people wondered whether Gome will regain its former stature without Huang at the helm.
"In the eyes of the Chinese people, a betrayer is worse than a hero with some flaws," said Tian Jian, an employee at one of Gome's suppliers.
The outcome of the September 28 board showdown between Chen and Huang was not anticipated by most respondents in an online poll by Sina.com. A posting on China's largest online portal showed 59 percent of 1.8 million participants across the nation were rooting for Huang.
"Huang has done something wrong, but he is the one who built Gome into China's biggest appliance retailer and he was once the mainland's richest man," Tian added.
"Chen coveted control of the company and took advantage of Huang."
Many of Huang's supporters say they hope he is hatching another plot to regain control of Gome.
He lost control of the company when institutional investors, who hold a combined 40 percent stake, backed Chen. Huang remains the retailer's largest shareholder with 30.6 percent of the shares.
"I think Chen was backed by institutional investors because Chen brings higher profitability, which is what these investors want," said Tang Jiarui, an analyst at Everbright Securities Co.?
Shareholders also rejected Huang's proposals to appoint his sister Huang Yanhong and his corporate lawyer Zou Xiaochun as executive directors.
However, Huang can take some solace from a failed motion to allow the board to issue up to 20 percent more shares, a tactic designed by his opponents to dilute his stake and reduce his voting power in Gome.
He also retained the right to call for another special shareholder meeting to vote again on a no-confidence motion against Chen.
Despite the controversy, Huang remains popular with the public. Young people like Lu Bin, an office worker, believe that Huang could take the retailer to new heights if he were allowed to run the company.
Actually, I was a supporter of Chen at first because I believed a listed company should put shareholders' interests first. After all, Chen did restore the company's share price after it fell following Huang's arrest. But now I am not so sure that Chen and his management team are adopting the right retailing strategy to lift profits even further.
The real issue may be how to increase market share in the world's biggest consumer market. Chen's strategy was to close 189 stores in 2009, a move which drew a fierce rebuke from Huang and minority shareholders.
"The pursuit of profitability at the cost of store numbers will harm Gome's strength in the long run," said Zhang Yue, an independent analyst who follows the home appliances market.
In the retail sector, adding a new store is considered to be 10 times harder than closing an existing one.
Gome's chief rival, Suning Appliances, has been profiting from its competitor's travails. Industry insiders told Shanghai Daily that Suning is able to grow at low costs because rents have fallen as competition eased.
People who are close to both companies also said that Gome is losing staff to Suning because these employees feel that the management battle has created instability and put their jobs at risk.
"As all people know, Huang has ambitions and will not easily give up," Everbright Securities' Tang said. "He may stage another fight, and the conflict will give Suning more room to develop into the country's largest electrical appliances retailer."
Gome was the country's largest electrical appliance retailer by number of stores and annual revenue at the end of 2008, when Huang's troubles with the law first surfaced. At the time, the company operated 1,333 stores, and Suning had 812 outlets. For the first half of 2008, Gome's revenue was 37 billion yuan (US$5.6 billion) against 26 billion yuan at Suning.
But the gap is narrowing, and some analysts said Suning may elbow Gome aside and grab the No. 1 spot when final financial figures for this year are reported.
First-half revenue at Gome stalled at 37 billion yuan while Suning's jumped 40 percent to 36 billion yuan. As of June 30, Gome operated 1,162 stores, and Suning lifted its total to 1,075.
"We intend to remain active and involved shareholders," Huang said in a statement issued after the September 28 meeting.
What are his options? From November 1, Huang can exercise the right to take back 372 stores that were not legally injected into the listed unit.
"As we have different ideas on future development, we are not willing to let the current management team continue to manage these stores," said Zou, Gome's corporate lawyer.
Further discussions have to be held on the right to use the Gome logo and name, which belong to the unlisted company, Zou said.
I am beginning to think the best option that could happen to Gome is Chen's voluntary resignation.
"I had thought of leaving Gome in 2008, but the company needed me at that time," Chen said in a televised interview before the shareholder meeting. "But now may be a good time because the current management team is experienced enough to weather all these storms."
If Huang is able to pick a suitable successor, shareholders might agree to lay aside their differences and allow the retailer to get on with what it knows best - retailing.
The result came as a surprise. Public opinion had been betting on the other side. Chen became chairman at the end of 2008 when Gome founder Huang Guangyu was detained by police on charges of illegal business dealings.
Huang was sentenced to 14 years in prison in May. From behind prison bars, he has been attempting to regain control of what was once the indisputably biggest electrical appliance retailer in China.
Many people wondered whether Gome will regain its former stature without Huang at the helm.
"In the eyes of the Chinese people, a betrayer is worse than a hero with some flaws," said Tian Jian, an employee at one of Gome's suppliers.
The outcome of the September 28 board showdown between Chen and Huang was not anticipated by most respondents in an online poll by Sina.com. A posting on China's largest online portal showed 59 percent of 1.8 million participants across the nation were rooting for Huang.
"Huang has done something wrong, but he is the one who built Gome into China's biggest appliance retailer and he was once the mainland's richest man," Tian added.
"Chen coveted control of the company and took advantage of Huang."
Many of Huang's supporters say they hope he is hatching another plot to regain control of Gome.
He lost control of the company when institutional investors, who hold a combined 40 percent stake, backed Chen. Huang remains the retailer's largest shareholder with 30.6 percent of the shares.
"I think Chen was backed by institutional investors because Chen brings higher profitability, which is what these investors want," said Tang Jiarui, an analyst at Everbright Securities Co.?
Shareholders also rejected Huang's proposals to appoint his sister Huang Yanhong and his corporate lawyer Zou Xiaochun as executive directors.
However, Huang can take some solace from a failed motion to allow the board to issue up to 20 percent more shares, a tactic designed by his opponents to dilute his stake and reduce his voting power in Gome.
He also retained the right to call for another special shareholder meeting to vote again on a no-confidence motion against Chen.
Despite the controversy, Huang remains popular with the public. Young people like Lu Bin, an office worker, believe that Huang could take the retailer to new heights if he were allowed to run the company.
Actually, I was a supporter of Chen at first because I believed a listed company should put shareholders' interests first. After all, Chen did restore the company's share price after it fell following Huang's arrest. But now I am not so sure that Chen and his management team are adopting the right retailing strategy to lift profits even further.
The real issue may be how to increase market share in the world's biggest consumer market. Chen's strategy was to close 189 stores in 2009, a move which drew a fierce rebuke from Huang and minority shareholders.
"The pursuit of profitability at the cost of store numbers will harm Gome's strength in the long run," said Zhang Yue, an independent analyst who follows the home appliances market.
In the retail sector, adding a new store is considered to be 10 times harder than closing an existing one.
Gome's chief rival, Suning Appliances, has been profiting from its competitor's travails. Industry insiders told Shanghai Daily that Suning is able to grow at low costs because rents have fallen as competition eased.
People who are close to both companies also said that Gome is losing staff to Suning because these employees feel that the management battle has created instability and put their jobs at risk.
"As all people know, Huang has ambitions and will not easily give up," Everbright Securities' Tang said. "He may stage another fight, and the conflict will give Suning more room to develop into the country's largest electrical appliances retailer."
Gome was the country's largest electrical appliance retailer by number of stores and annual revenue at the end of 2008, when Huang's troubles with the law first surfaced. At the time, the company operated 1,333 stores, and Suning had 812 outlets. For the first half of 2008, Gome's revenue was 37 billion yuan (US$5.6 billion) against 26 billion yuan at Suning.
But the gap is narrowing, and some analysts said Suning may elbow Gome aside and grab the No. 1 spot when final financial figures for this year are reported.
First-half revenue at Gome stalled at 37 billion yuan while Suning's jumped 40 percent to 36 billion yuan. As of June 30, Gome operated 1,162 stores, and Suning lifted its total to 1,075.
"We intend to remain active and involved shareholders," Huang said in a statement issued after the September 28 meeting.
What are his options? From November 1, Huang can exercise the right to take back 372 stores that were not legally injected into the listed unit.
"As we have different ideas on future development, we are not willing to let the current management team continue to manage these stores," said Zou, Gome's corporate lawyer.
Further discussions have to be held on the right to use the Gome logo and name, which belong to the unlisted company, Zou said.
I am beginning to think the best option that could happen to Gome is Chen's voluntary resignation.
"I had thought of leaving Gome in 2008, but the company needed me at that time," Chen said in a televised interview before the shareholder meeting. "But now may be a good time because the current management team is experienced enough to weather all these storms."
If Huang is able to pick a suitable successor, shareholders might agree to lay aside their differences and allow the retailer to get on with what it knows best - retailing.
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