CDC Corporation

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CDC Corporation

18 Whitfield Rd.
Causeway Bay
Hong Kong
Telephone: +852 2893 8200
Fax: +852 2893 5245
Web site: http://www.cdccorporation.net

Public Company
Incorporated: 1994 as China Internet Corporation
Employees: 1,179
Sales: $182.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CHINA
NAIC: 541512 Computer Systems Design Services

Once one of China's hottest internet-focused stocks, formerly known as chinadotcom, CDC Corporation has repositioned itself as a provider of integrated software systems for Enterprise Resource Planning (ERP), Supply Chain Management (SCM), Customer Relationship Management (CRM), Human Resources Management (HRM), and Business Intelligence applications. As part of its change in direction, CDC has made a number of strategic acquisitions, namely of Ross Systems (ERP), IMI Corp. (SCM), and Pivotal Corporation (CRM). The company expects to leverage the technological expertise of these North American businesses in its quest to capture a major share of the soon-to-boom enterprise software market in China, and particularly among mid-sized businesses. In addition, CDC has launched CDC Outsourcing, which provides outsourcing services for companies seeking to establish manufacturing and other operations in China. The company's Mobile Applications and Portal Operations targets the mobile telephone market with software and services for SMS, WAP, MMS, and other mobile telephone applications. CDC was the first Chinese company to list on the NASDAQ. In 2004, the company's sales topped $180 million.

Chinese Internet Pioneer in the 1990s

In 1994, James Chu, who had worked for some time in the U.S. high-tech industry, returned to his native Hong Kong in order to play a pioneering role in introducing the Internet to both that city and mainland China. Chu set up a business, China Internet Corp. (CIC), becoming one of the very first in the market. That early entry also enabled Chu to register three extremely well-chosen domain names: China.com, Hongkong.com, and Taiwan.com.

Soon after forming the company, Chu brought in Peter Yip, who later became the driving force behind CIC's transition into chinadotcom. Like Chu, Yip was a Hong Kong native who had gained a good deal of experience in the United States. After completing studies in computer engineering at the University of Pennsylvania, and receiving an MBA from the Wharton school, in the 1970s, Yip went on to found a number of businesses in the United States, including Yipkon, founded in 1982 and later sold to SHL Systemshouse (later part of MCI).

Yip helped CIC engineer an important partnership via the sale of a one-third stake in the company to mainland China's official news agency, Xinhua. Chu and Yip shared the remaining two-thirds of the company. The association with Xinhua led CIC to put in place an ambitious business plan: that of constructing the China World Web, a countrywide Internet for the Chinese market operating parallel to the global internet. CIC's infrastructure was to serve as an intranet of sorts that enabled communication among the Chinese population, with access to outside sources carefully screened. In this way, the Chinese government hoped to maintain control of information transmitted into the country.

Yip and Chu managed to raise some private investment capital to get the company off the ground. Yet its two attempts in the mid-1990s to take the company public met with a lack of interest from the investment community, in large part because of its relationship with Xinhua. Through 1996, CIC continued its efforts in the development of its Chinese intranet. However, the ability to put the network into place, and the likelihood of being able to "tame" the internet, appeared less and less likely.

By 1997, CIC had changed strategy. The company was now clearly driven by Yip, and that year Chu was squeezed out of the company in a boardroom struggle. Yip now reregistered the company outside of China, in the Cayman Islands, a move to appease potential investors of the threat of a Chinese government clampdown on domestic internet-oriented companies after the transfer of Hong Kong to mainland control. The company also changed its focus, adopting a strategy of developing web portals based on its domain name and offering web design services to Chinese companies eager to establish a presence on the World Wide Web. As a reflection of the group's change in focus, it adopted a new name, China.com Corporation.

A key factor in the company's change in orientation was the launch of a partnership with another fast-rising Hong Kong-based company, The Web Connection. That company had been founded in 1995 by Peter Hamilton, originally from the United Kingdom with a background in law, and Ian Henry, who had come to Hong Kong with a background in marketing. The Web Connection became one of the first to offer web design services in Hong Kong.

Hamilton and Henry provided China.com with the expertise in building web sites and in the construction of a web portal, or an entry point providing links of interest to sites on the Internet. The company meanwhile maintained its association with Xinhua. By 1998, the partnership between China.com and Web Connection had flourished, and in that year, China.com purchased a 51 percent stake in the Web Connection. In February 1999, the two companies were restructured into a new entity, chinadotcom Corporation.

The company now adopted a new strategy based on the mission: "Build, Sell, Distribute," that is, build web sites, sell advertising space, and distribute content through its own portals. The company—in part because of its possession of the china.com domain—became a focal point for the huge surge in interest in the development of China's internet market. While only an estimated four million Chinese had online access in 1999, the number was forecast to soar to as high as 140 million or more by 2005, making China one of the world's largest internet markets.

Yip, along with Hamilton and Henry, now prepared a third attempt to take the company public, scheduling an initial public offering (IPO) on the NASDAQ for July 1999. The IPO was to represent the first time a Chinese company had listed its shares on the high-technology oriented exchange. The investment community nonetheless remained somewhat skeptical about the company, primarily due to its continued association with Xinhua. Indeed, while a number of competitors had sprung up, including Sina.com, Suho.com, and NetEase.com, chinadotcom's own portal, hampered by Xinhau censorship restrictions, lagged behind in terms of content and in the number of visitors.

Just three weeks before its IPO, however, Yip pulled off a coup, announcing that AOL had agreed to acquire a 10 percent stake in chinadotcom. The association of the company with the world's leading online content provider piqued investor interest, and at the end of its first day of trading, chinadotcom's share price had surged more than 200 percent.

Chinadotcom quickly began amassing a war chest. On top of the $97 million raised in its IPO, the company added nearly $400 million in a secondary offering in January 2000. (Yip, Hamilton, Henry, and other investors pocketed nearly $100 million of that offering.) In March 2000, the company added nearly $170 million more through the listing of 18 percent of its hongkong.com subsidiary on the new GEM (Growth Enterprise Market) board of the Hong Kong Stock Exchange.

Flush with cash, chinadotcom went on a buying spree, picking up part or all of some 50 companies over the next year. While most of the group's investment involved web site developers and content providers, such as look.com, based on sales of duty free cosmetics, a number of the group's purchases also went toward building its technological expertise. Such was the case with its acquisition of Australia's XT3, an Internet integrator, and Hong Kong's e2e Business Solutions, which provided software and information technology (IT) systems services. By the end of 2000, the company's revenues had soared from just $20 million in 1999 to over $120 million. Meanwhile, the company's payroll swelled to 2,400 employees. The company was by then present in most of the major Asian markets.

Reshaping Strategy for the 2000s

Like its competitors, chinadotcom was hit hard by the crash in the Internet sector in mid-2000. The company's stock, which had soared to a peak of $270 per share, collapsed to a low of just $5 per share. Worse for chinadotcom, a new generation of easy-to-use web development software had made its core business more or less obsolete. At its lowest point, the company's market valuation had dipped below even its available cash assets.

Henry left the company soon after, followed by Hamilton in 2001. Web Connection was subsequently rebranded as Ion Global. Chinadotcom then underwent a drastic restructuring, shedding more than 1,100 jobs and cutting costs by some 60 percent over the next year.

Yip now set about rebuilding the company. In this, the company was aided by a strong treasury. Despite its acquisition spree, the company had maintained control of the majority of the capital raised in its offerings. This cash enabled the company to absorb its continuing losses, while reshaping its future strategy.

Company Perspectives:

From its early days as an Internet pioneer in Asia, the Company has grown and evolved into a global provider of enterprise software, business solutions and mobile and Internet applications. Our name change to CDC Corporation helps clarify the identity of the Company and better reflects our development into a larger and more diverse enterprise. The new name, without "dotcom," signals the shift of our business focus away from a heavy reliance on the Internet sector. In addition, the new name without the clear component of "china" symbolizes the Company's more geographically diversified revenue and customer mix.

By 2002, the company had adopted a new two-pronged business model. The first part of that strategy was based on the booming mobile telephone market in China. To this end, the company began making new acquisitions, such as the March 2003 purchase of New Palm (China) Information Technology Co., through Hongkong.com, a provider of SMS (short messaging service) services for the mobile telephone market. The company followed that purchase with a number of other acquisitions in order to establish a network across mainland China, as well as in Hong Kong and Taiwan.

The other part of the company's new strategy emerged in late 2003 as the company began targeting the provision of enterprise software solutions, particularly to the mid-sized business market in China. This sector was expected to grow strongly into the new decade, in particular because the vast majority of Chinese companies had not yet adopted information systems technology.

To this end, chinadotcom began amassing the technological expertise in order to position itself as a primary provider in this market. In order to acquire this expertise, the company turned to North America, targeting a number of acquisitions to give it a foothold into the full range of enterprise software sectors. The first of these came in September 2003, when the company announced its purchase of a majority share of Industri-Matematik International Corporation (IMI). This company, with U.S. headquarters in New Jersey, brought chinadotcom expertise in supply chain management applications, as well as clients in the United States and Europe.

By the end of 2003, chinadotcom had reached a new agreement, this time in order to acquire Pivotal Corporation, based in Vancouver, Canada. This acquisition, which brought the company Pivotal's successful customer relationship management (CRM) technology, encouraged chinadotcom to focus its future strategy more narrowly on its growing enterprise software wing. In February 2004, the company announced plans to spin off its mobile and internet businesses as a separate, publicly listed company.

The next prong in chinadotcom's new growth effort came in early 2004 when the company announced the takeover of Ross Systems, based in Atlanta, Georgia, a provider of back office applications, such as Enterprise Resource Planning, and others.

By the end of 2004, the reasoning behind chinadotcom's choice of North America for its acquisitions became increasingly clear, as the company launched a new subsidiary, CDC Outsourcing. The company now hoped to take advantage of the rising numbers of internationally operating companies that had begun outsourcing their manufacturing and other requirements to factories in China. Chinadotcom then began developing software and services targeting this sector.

By then, Yip had taken a leave of absence from the company, followed by his resignation from the company in March 2005. Nonetheless, chinadotcom appeared to be on the growth track, despite continued struggles for profitability. With Yip's departure, and given its selloff of its internet operations, chinadotcom announced its proposal for a change in name, to CDC Corporation. The company had survived the birth pangs of China's technology sector and was expected to become a major player in one of the world's fastest growing IT markets.

Principal Subsidiaries

CDC Software; Industri-Matematik International Corp.; Pivotal Corporation; Ross Systems, Inc.

Principal Competitors

Oracle Corporation; Microsoft Business Solutions; Huawei Technologies Company Ltd; eSoftBank Inc.; China Greatwall Computer Shenzhen Company Ltd.; Sina.com Ltd.; Sohu.com Inc.; ECS Technology China Ltd.; IT United Beijing.

Key Dates:

1994:: James Chu founds China Internet Corporation in Hong Kong and is joined by Peter Yip, who helps arrange investment from Xinhau news agency.
1997:: Company begins partnership with The Web Connection, set up by Peter Hamilton and Ian Henry, changes name to China.com Corporation.
1998:: Company acquires majority control of Web Connection.
1999:: Web Connection is integrated; company name changes to chinadotcom; becomes first Chinese company to list on the NASDAQ.
2000:: Company launches acquisition drive, buying up 50 firms and boosting sales at least fivefold.
2001:: Company restructures, shedding 1,100 jobs amid internet stock crash.
2002:: Change in strategy is pursued as web site development business becomes obsolete; company begins targeting mobile telephone services market.
2003:: Company adds new business in enterprise software development, acquiring IMI (United States) and Pivotal Corporation (Canada).
2004:: Company sells off mobile telephone and internet businesses to focus on enterprise software; Ross Systems is acquired.
2005:: Peter Yip resigns as CEO; company announces plans to change name to CDC Corporation.