Lawyers Question Giant Interactive Buyout

| About: Giant Interactive (GA)
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It may be quiet in the U.S. during the Thanksgiving holiday, but shareholder lawyers were hard at work scrutinizing the new management-led buyout offer for online game operator Giant Interactive (NYSE: GA), with at least 2 hinting they will file lawsuits to seek a better bid. This is the second time we've seen lawyers question a buyout offer for a U.S.-listed Chinese firm, following a similar development for privatizing telecoms software maker AsiaInfo-Linkage (Nasdaq: ASIA). Both cases highlight the challenges that such buyouts can face, especially when buyer groups have strong ties to the companies they are seeking to privatize.

Giant made headlines earlier when it announced it had received a buyout offer from a group led by its controversial founder and chairman Shi Yuzhu (previous post). The group offered $11.75 for each Giant Interactive American Depositary Share (ADS), representing a respectable 16 percent premium to the company's share price before the bid was announced. The offer price is still considerably lower than the $15.50 per ADS that investors paid for Giant's shares at the time of its New York IPO in 2007.

Now at least 2 law firms have come out saying that the offer may be too low, and are threatening potential lawsuits to seek a better deal (announcement 1; announcement 2). Both announcements are relatively typical, and are basically looking for shareholders who would be interested in joining a potential lawsuit claiming the company is worth more than the buyout offer implies.

This particular development is interesting, because we've seen quite a few similar buyout offers for U.S.-listed Chinese firms over the last year, with names like Shanda Interactive, Focus Media and Seven Days successfully de-listing, and others like Pactera (Nasdaq: PACT) and Simcere Pharmaceutical (NYSE: SCR) waiting to de-list. The stream of privatizations is being driven by a lack of investor interest in the companies, following a series of accounting scandals at U.S.-listed Chinese firms in 2011 that tainted the entire sector.

But while many companies launched privatization bids, Giant and AsiaInfo are 2 of the only ones so far to draw accusations that offer prices undervalued the companies. In the case of AsiaInfo, I previously wrote that failed bidders who wanted to pay more for the company may have triggered the wave of lawsuits (previous post). In that case, AsiaInfo ended up accepting an offer from a Chinese group with close ties to the company, in what looked like an insider deal.

Based on my limited knowledge about Giant, I suspect similar factors may be at play in this latest round of threatened lawsuits. Shi Yuzhu is already a controversial character in China's Internet world, and earlier this year, he resigned his post as Giant's CEO. His company had come under fire in 2011 when news emerged that it had invested in an insurance company with little or no relationship to its core gaming business, prompting the resignation of its CFO at that time.

In both the AsiaInfo case and now this case with Giant, the shareholder lawsuits are probably less aimed at halting the buyouts and more likely designed to get better offers from the buyout groups. If that's the case, investors don't seem convinced that a higher offer will be coming for Giant. Since their original jump after the buyout offer, Giant's shares have actually given back some of their gains and now trade at $11.25, a full 4 percent below the buyout price. If I were betting, I would say this particular buyout has a better than 50 percent chance of success, and that we could see the group raise its offer to perhaps $12 to quiet the legal challenges. But that could take some time, and it's always possible the deal could collapse if market conditions change dramatically.

Bottom line: A management-led group could raise its buyout offer for Giant Interactive to quiet a series of threatened lawsuits claiming the current offer is too low.

Disclosure: No positions