Tech Giants: Starting from Bankrupt Companies

181: Chapter 181 The ”Capital Game” of Spin-off ListingsThe meeting lasted for three hours.

The final plan was determined: February’s production capacity would be allocated as planned, and the bidding and sharing platform would be piloted starting in March.

After the meeting adjourned, Su Chen and Luo Qinghe remained in the conference room.

”Under a lot of pressure, huh?” Su Chen said.

Luo Qinghe rubbed his temples: ”Every time I open my eyes, I’m met with calls from dozens of companies chasing for chips. But compared to before—when we had to beg others to sell chips to us—this is a happy problem.”

”What about Europe?” Su Chen asked, ”How is the EDA rescue operation progressing?”

Luo Qinghe pulled up the report: ”Very smoothly. Our expert team has already restored the design capabilities of three companies, and the ’Shennong’ platform has been installed over five thousand times in Europe. Academician Li Weimin is currently communicating with the European Union Standards Committee to promote ’Shennong’ as the recommended tool for chip design in Europe.”

”What is America’s reaction?”

”Aside from tough talk, there haven’t been any substantive actions yet.” Luo Qinghe smiled, ”They probably didn’t expect Europe’s reaction to be so intense. The French Minister of Economy publicly stated yesterday: ’If America continues its sanctions, Europe will consider reciprocal countermeasures, banning American chip design companies from entering the European Union market.’”

”A cornered dog jumping over a wall.” Su Chen commented, ”But be careful; America will not give up easily.”

”Understood.” Luo Qinghe nodded, ”That’s why we’ve accelerated the 7-nanometer R&D. As long as we catch up in advanced manufacturing processes, all of America’s blockades will become a joke.”

Outside the window, the sky of Shenzhen was deep blue.

The production lines at the four chip bases were churning out wafers carrying the era of Huaxia’s intelligence at a speed of dozens per minute.

February 10th, Spark Technology Headquarters Boardroom.

9:00 AM, Board of Directors meeting.

Around the oval mahogany table sat the nine directors of Spark Technology, along with representatives from four top investment banks.

Xu Zhenyu, 42, a partner at the country’s largest investment bank, ’Huatai Capital,’ was wearing a custom-made suit today, with cufflinks in the shape of miniature chips. He stood in front of the large screen, the dot of his laser pointer dancing across the PPT.

”Board members, after three months of deliberation, we have formed the final split-listing plan.”

The large screen displayed:

Spark Technology Business Split Blueprint — ’Seven Swords Descend the Mountain’

Spark Electronic Technology (Consumer Electronics Business)

Includes: Mobile phones, tablets, laptops, smart wearables, IoT devices.

2017 Revenue: 80 billion. 2018 Expected Revenue: 200 billion.

Net Profit: 32 billion.

IPO Valuation: 2 trillion.

Listing Location: Shenzhen Stock Exchange Main Board.

Time: April 1st (Planned).

Spark Semiconductor

Includes: Full industry chain of chip design, manufacturing, and packaging/testing.

2017 Revenue: 50 billion (Domestic business only). 2018 Expected Revenue: Massive explosion to 200 billion.

Net Profit: 15 billion (Huge R&D investment).

Valuation: 3 trillion (Huge potential).

Listing Location: To be determined (Considering A + H).

Spark Power

Includes: Battery, motor, electronic control (Three-Electric System).

2017 Revenue: 120 billion. 2018 Expected Revenue: 240 billion.

Net Profit: 48 billion.

Valuation: 2 trillion.

Listing Time: July 2018.

Spark Materials

Includes: Semiconductor materials, battery materials, special alloys.

2017 Revenue: 80 billion. 2018 Expected Revenue: 200 billion.

Net Profit: 32 billion.

Valuation: 1.5 trillion.

Spark Auto

Includes: Red Flag brand, overseas automotive business.

2018 Expected Revenue: 150 billion.

Net Profit: -5 billion (Investment phase).

Valuation: 1.2 trillion (Based on 8x Price-to-Sales ratio).

Spark Industry

Includes: High-end equipment, industrial software, screens and optoelectronics.

2018 Expected Revenue: 120 billion.

Expected Net Profit: 36 billion.

Valuation: 800 billion.

Spark Investment

Includes: Investments in banking, insurance, securities, and other financial sectors.

Asset Scale: 500 billion.

Valuation: Will not be listed; Su Chen will hold 100% after the split.

”The total valuation of the seven companies: 10.5 trillion.” Xu Zhenyu reported the figure, ”And Spark Technology’s current total market value is 3.2 trillion. This means that after the split, the overall valuation will increase by 228%.”

The conference room was quiet enough to hear breathing.

An independent director spoke up: ”Mr. Xu, I understand the valuation. But after the split, how will the issue of control be resolved? With seven companies listing independently, Mr. Su’s shareholding ratio will inevitably be diluted.”

Xu Zhenyu switched to the next page.

Spark Holdings Equity Structure

The pyramid chart showed:

Top layer: ’Chenxing Investment,’ 100% owned by Su Chen.

Second layer: Chenxing Investment holds 100% equity of ’Spark Holdings’.

Third layer: Spark Holdings holds 51% - 70% equity in the seven subsidiaries.

Fourth layer: After the seven subsidiaries go public, public shareholders will hold 30% - 49%.

”Mr. Su maintains absolute control over each subsidiary through a two-layer holding structure,” Xu Zhenyu explained, ”The listing dilutes Spark Holdings’ shareholding ratio in the subsidiaries, but it does not affect Mr. Su’s control over Spark Holdings. Moreover, the 51% minimum shareholding is written into the company’s articles of association; any additional issuance requires the consent of the controlling shareholder.”

Another director asked: ”Why split? Isn’t it fine as it is now? Business synergy, resource integration.”

Xu Zhenyu looked at Su Chen.

Su Chen nodded, answering the question himself.

”Director Li, let me ask you a few questions,” Su Chen said, ”First, is the valuation logic for the semiconductor business the same as for consumer electronics?”

”No. Semiconductors look at technological barriers, while consumer electronics look at market share.”

”Second, how much overlap is there between the customers of the power battery business and the chip business?”

”Less than 30%.”

”Third, if we don’t split, how will the capital market price us?” Su Chen continued, ”Should a company that makes chips, cars, batteries, and materials be valued as a tech stock or a manufacturing stock?”

Director Li fell silent.

”The rule of the capital market is: specialized companies have higher valuations,” Su Chen said, ”TSMC only does manufacturing, and its market value is 4 trillion. Tesla makes complete vehicles, and its market value is 5 trillion. If we put all our businesses together, the capital market won’t understand it and can only give us a discount.”

He walked to the whiteboard and wrote down three words:

Transparency, Specialization, Incentivization

”The first goal of the split: to make the finance, operations, and strategy of each business segment completely transparent. Listed companies must disclose regularly and accept supervision, which can force management to improve.”

”The second goal: to allow each segment to finance independently. If the semiconductor business needs to expand production, it can issue shares privately; if the automotive business wants to acquire overseas brands, it can issue convertible bonds. There’s no need to put all the pressure on the parent company.”

”The third goal: equity incentives.” Su Chen emphasized, ”The employee stock ownership plan for Spark Electronics has already been designed. After listing, all employees who have been with the company for more than a year can purchase company stock at 80% of the market price, with a cap of three times their annual salary.”

He paused: ”We have 20,000 employees. If everyone becomes a shareholder, how will they work?”

In the conference room, the directors exchanged looks.

”But the split process is very complex,” the CFO reminded, ”Taxation, asset stripping, personnel diversion, contract resigning... it will take at least a year.”

”That’s why we are doing it in steps,” Xu Zhenyu replied, ”The first step is to split off the most mature consumer electronics business — Spark Electronic Technology. This company has independent operations, clear financials, and stable customers, making the split the least difficult.”

He displayed the timeline:

Spark Electronic Technology Split Listing Process

February 10th (Today): Board resolution, announcement of the split plan.

February 11th - March 10th: Exchange inquiries, company responses, supplementary materials.

March 15th: CSRC approval.

March 20th - 31st: Roadshow, inquiry, pricing.

April 1st: Listed on the Shenzhen Stock Exchange.

”Key point: The parent company, Spark Technology, does not need to suspend trading,” Xu Zhenyu emphasized, ”Because this is a ’spin-off of a subsidiary for listing,’ the parent company itself does not involve major asset restructuring; it only needs to fulfill its information disclosure obligations.”

Su Chen added: ”Moreover, the funds raised from the Spark Electronics listing will mainly be used to acquire relevant assets from the parent company, achieving a virtuous cycle.”

Voting began.

Nine directors, eight votes in favor, one abstention.

The plan was passed.