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When investors talk about “zombie” companies, they’re usually referring to distressed start-ups that are hobbling along, unable to grow and unlikely to ever return the money they’ve raised.
But as deal-makers feverishly debated efforts this past week by lawmakers to force TikTok’s Chinese parent company, ByteDance, to sell the app, they talked about a new version: China zombies.
Ant Group headquarters in Hangzhou, China. The financial giant was eyeing a Wall Street float but it was put on ice in 2020.Credit: Bloomberg
China zombies may have booming businesses, but they’re unlikely to provide investors with any immediate return because they’re stuck in geopolitical crosshairs.
It’s not just the investors in ByteDance who, after handing it more than $US8 billion ($12.2 billion), are stuck. What looked like a mammoth growth opportunity just a few years ago — inspiring investors to pour money into companies such as Ant Financial (now Ant Group), PingPong and Geekplus — has turned hostile.
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“There’s more out there like ByteDance,” Evan Chuck, a partner at the advisory firm Crowell, said of companies with investors who may find themselves in this position. “It’s only really heating up further.”
Selling is increasingly a long shot. Take TikTok. Even if ByteDance puts the app up for sale, the Chinese government is unlikely to allow the company’s most valuable asset, its recommendation algorithm, to be included. The country introduced new export control rules for technologies like that algorithm in 2020, just as TikTok was nearing a deal with US buyers (which eventually fell apart).
Jonathan Knee, a professor at Columbia Business School and an adviser at the investment bank Evercore, said any company that acquired TikTok would most likely own the brand but not the underlying software and algorithms. He compared buying TikTok without its algorithm to buying Hulu without the rights to its content. “It’s not completely clear what you’re buying,” he said.
Many other Chinese tech companies would face similar hurdles if they tried to sell to a US buyer. And China’s slowing economy has depressed company valuations, making a sale there unappealing to investors. The number of Chinese companies that were acquired last year, 3151, was half the total of 6341 in 2019, according to the financial data company Dealogic.