Speaker 1: Decrypted is brought to you by red Hat, whose broad
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Speaker 1: get from where you are to where you want to be.
Speaker 1: Red Hat the open technology to help you realize your vision.
Speaker 1: Learn more at red hat dot com slash open tech. Hello, Hi,
Speaker 1: it's sleepy, nice sleepy. That's my son Leo playing Talking Tom.
Speaker 1: It's a smartphone game with a taffy cat named Tom.
Speaker 1: Is kind of a digital pet. You feed him, bathe him,
Speaker 1: put him to bed, and he'll repeat back whatever you say.
Speaker 1: It's fun even send Tom to the bathroom every now
Speaker 1: and then. Something kids find hysterical, you do. Talking Tom
Speaker 1: is one of the most popular mobile kids games ever
Speaker 1: made aid. Since being introduced in two thousand ten, it's
Speaker 1: been number one in more than one hundred countries. It
Speaker 1: has more than three hundred forty eight million monthly active users,
Speaker 1: and it's been downloaded more than six billion times. It's
Speaker 1: a go to for parents who want to pacify their children.
Speaker 1: There are more than two million apps on Apple's app store.
Speaker 1: Talking Tom is the fairy tale success that software developers
Speaker 1: dream of, But Talking Tom wasn't made in Silicon Valley
Speaker 1: or by a well known tech company. A married couple
Speaker 1: in Slovenia, Samo and ez A Logan, used their savings
Speaker 1: to start a company called Outfit seven. They have been
Speaker 1: working in Slovenia's small tech industry when they decided to
Speaker 1: join the app craze a few years ago. They made
Speaker 1: a few apps, but it was Talking Tom that really
Speaker 1: took off. The company made more than one hundred million
Speaker 1: dollars a year in profit from advertising and also from
Speaker 1: these virtual things that you can buy in their games.
Speaker 1: Then in January, sam O and ez A sold Outfit
Speaker 1: seven for one billion dollars. They'd never taken outside money
Speaker 1: from investors, so their steak together was worth more than
Speaker 1: six hundred million dollars. The rest went to co founders
Speaker 1: and employees. The most intriguing part of this story is
Speaker 1: actually who bought this company. It wasn't just another gaming
Speaker 1: or media company or some tech investor like you might expect.
Speaker 1: The buyer of this kid's game was one of China's
Speaker 1: largest makers of hydrogen peroxide. Hi Am Akia and I'm
Speaker 1: Adam Satriano, and this week on Decrypted, we're going to
Speaker 1: untangle the mystery behind why a company that makes cleaning
Speaker 1: chemicals would start buying video game apps. And it isn't
Speaker 1: just one deal. Recently, there have been all kinds of
Speaker 1: unlikely Chinese buyers, from instruction and real estate companies to
Speaker 1: mining firms and aluminum smelters, even a poultry company or
Speaker 1: snapping up entertainment and gaming companies like Outfit seven. These
Speaker 1: are complicated deals with a risky business strategy driving them,
Speaker 1: but they give us a secret glimpse into what's actually
Speaker 1: going on in China right now. The economy is slowing
Speaker 1: and many businesses are worried about how they're going to
Speaker 1: keep on making money. They're scrambling to find new sources
Speaker 1: of growth. Our guide will be a young investor from
Speaker 1: Beijing named Lisa Pan. Her task is to transform a
Speaker 1: different Chinese industrial company. This one's an iron ore and
Speaker 1: construction for many people didn't want to talk about these deals,
Speaker 1: but Lisa agreed to give us a look inside. So, Adam,
Speaker 1: you're are a tech reporter in London and our protagonists
Speaker 1: for this week Lisa Pan. How did you get to
Speaker 1: know her? After this Talking Tom game got purchased for
Speaker 1: one billion dollars by a chemicals company. I think, like
Speaker 1: a lot of people I was wondering, what is this?
Speaker 1: And so I called around to to try and figure
Speaker 1: out what was going on, and as several people recommended
Speaker 1: a meeting Lisa, and so we traded a few emails
Speaker 1: and she agreed to meet with me when she was
Speaker 1: going to be in London negotiating a deal to buy
Speaker 1: another gaming company. All right, let's see she's home. Lisa
Speaker 1: lives in one of these really nice parts of London,
Speaker 1: South Kensington, and one of those picturesque streets with rose
Speaker 1: a big stately Victorian residences all painted the same bright
Speaker 1: white with big black doors. Hyde Park. It was a
Speaker 1: few blocks away. She didn't answer, so I had to
Speaker 1: wait around a bit because I stood out front, Tourists
Speaker 1: would stop and take pictures. A double decker buses went by.
Speaker 1: Then later I couldn't help myself and I looked up
Speaker 1: how much the house cost. How much was it? It
Speaker 1: was listed for ten point five million pounds, so that's
Speaker 1: about thirteen million dollars. Sounds like quite the house. A
Speaker 1: few minutes later, Lisa showed up with a friend. All right,
Speaker 1: how are you we have and I don't hardly. She
Speaker 1: didn't have keys to the house, so we had to
Speaker 1: wait for an attorney. She works with somebody she calls
Speaker 1: uncle Andrew. He showed up to let us in. And
Speaker 1: what was it like inside? Unbelievable. She's remodeling the entire house,
Speaker 1: six floors gutted down to the floorboards. So clearly this
Speaker 1: is someone who's incredibly successful. Yeah, and she fell into
Speaker 1: this line of work somewhat unexpectedly. So have a to
Speaker 1: start to tell me a bit about yourself. Where did
Speaker 1: you grow up? What was your childhood like? Yeah, so
Speaker 1: I was born in Chounchin, South Salva, China. Are actually
Speaker 1: it is one of the biggest city in Chaer So
Speaker 1: we have all around thirteen men population. It's very big
Speaker 1: city and so um. While I was ten years old,
Speaker 1: I started to work for TV station, but work just
Speaker 1: like a child TV presenter for the you know, like
Speaker 1: child program and so that's why I always interested in
Speaker 1: like the TV media sector. So I did my university
Speaker 1: in Beijing. So when I was six years old, I
Speaker 1: moved to Beijing. I went to university and before Lisa
Speaker 1: graduated from college, she started working for a TV station
Speaker 1: in Beijing. I interviewed all the leading entrepreneurs and the
Speaker 1: metro capitalists. That's how my career started. So since I
Speaker 1: built my social rightwork and experience and in the TV sector,
Speaker 1: because you met so many you know, leading entrepreneurs and
Speaker 1: wentro capitalists, and I started to find it quite interesting
Speaker 1: to make some startup investments. So at this point, most
Speaker 1: people who become interested in this world would need to
Speaker 1: first join in existing that your capital firm, or they
Speaker 1: need to be otherwise independently rich to have this money
Speaker 1: to invest in the first place. In Lisa's case, she
Speaker 1: turned to her parents. But so you go to your
Speaker 1: parents and say, I don't want to be in TV anymore.
Speaker 1: I want to invest money. Can I borrow two million
Speaker 1: R and B? And they just we're okay with that?
Speaker 1: Did they did they think that maybe you're a little
Speaker 1: bit nuts for no not writing. I think my parents
Speaker 1: always being very supportive. But you know Chinese parents is
Speaker 1: I think the culture is very different. So Chinese parents
Speaker 1: they are very stricted children. But I say the same time,
Speaker 1: and they are also being verver supportive. So it's like
Speaker 1: they gave everything just to their children. They don't reserve
Speaker 1: innson for themselves. She used that money about two d
Speaker 1: and fifty dollars and put it into bast growing companies
Speaker 1: like the game's company, raikup browser firm you see web
Speaker 1: and the smartphone and electronics makers show me. And these
Speaker 1: were successes, some of them were massive successes. The investments
Speaker 1: in some cases ended up being worth more than a
Speaker 1: hundred times which she had first put in. But you
Speaker 1: made a lot of smart investments. What did that turn into?
Speaker 1: I mean a lot of these investments are ten times
Speaker 1: or a hundred times. You are You're somewhat unassuming, But
Speaker 1: are you a billionaire? Oh? I have to say I'm
Speaker 1: with some distance. You know, manly will see and through
Speaker 1: my injury investment, but you won't say yeah, yeah. I
Speaker 1: think that's his two friways. So adam this potential billionaire
Speaker 1: hiding in plain site. How she at? Lisa's thirty two,
Speaker 1: and she's somewhat unassuming. She is soft spoken, and I
Speaker 1: think many people wouldn't necessarily expect her to be a
Speaker 1: big time tech investor. But she's also kind of glamorous.
Speaker 1: She was wearing this beautiful tan trench coat, these glamorous shoes,
Speaker 1: and I also learned some interesting things about her. She
Speaker 1: used to race Ferrari. She's starting to learn to box,
Speaker 1: so She's a very interesting person. And so here's this
Speaker 1: Ferrari racing, very successful, very young, very glamorous startup investor.
Speaker 1: What happened next? You know where you want to be.
Speaker 1: Red hat has the broad portfolio of open source technologies
Speaker 1: to get you there. Meet your evolving business challenges head
Speaker 1: on with secure solutions for the enterprise, including Linux platforms
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Speaker 1: to learn more. Red Hat the open technology to help
Speaker 1: you realize your vision. Lisa had a family friend at
Speaker 1: this big construction company called Shongji Enterprises, and he approached
Speaker 1: her about transforming his business. The backdrop is that the
Speaker 1: economy has cooled down in China. Back in the economy
Speaker 1: was growing at more than a tem per cent rate,
Speaker 1: and that's been steadily coming down. Last year it was
Speaker 1: six point seven. Okay, So before a construction company that
Speaker 1: had relied on so many buildings going up back in
Speaker 1: the heavy days. This is a pretty big problem. And
Speaker 1: Lisa's friend asked her for advice. I say it to
Speaker 1: game sectories. Maybe at a moment it is the best
Speaker 1: of for us because always high profit margins cash call.
Speaker 1: And then we decided to you know, see our own
Speaker 1: construction business and and boat the gaming business. So that's
Speaker 1: why we bought first. I think a lot of people proticting, well,
Speaker 1: I think that that's just crazy if you're if you're
Speaker 1: someone whose business is in construction and and you're deciding,
Speaker 1: you know, now I'm going to change and go into
Speaker 1: games and entertainment. They're totally unrelated, and so it seems
Speaker 1: that that would be a very dramatic change to make
Speaker 1: for a company. So, Adam, tell me about this gaming
Speaker 1: business that Lisa helped this construction company to buy. It's
Speaker 1: a company called jag X, and I'd never heard of
Speaker 1: it before this. It makes a somewhat popular multiplayer online
Speaker 1: fantasy game called room Scape. I think like World of
Speaker 1: Warcraft with Wizard and Fantasy and things like that. Okay,
Speaker 1: it was it was the end of her pregnancy when
Speaker 1: she was making this deal. She was having her second child,
Speaker 1: and the Jagex executives and advisors came out to meet
Speaker 1: her in China to hammer out the deal, and Lisa
Speaker 1: said that she really had to overcome some uncertainty among
Speaker 1: the company because they didn't know what this company was,
Speaker 1: and they wanted to feel out whether or not this
Speaker 1: would be a right place for the company to go.
Speaker 1: So then person meeting really helped. I think every Chinese company,
Speaker 1: if they explored their business in and our western country,
Speaker 1: will face these same questions. Yes, definitely, and they did
Speaker 1: to understand why it's a construction business and do you
Speaker 1: want to buy a game company like you asked, And
Speaker 1: my answer is was because we want to answer into
Speaker 1: you know, our high growth rate sector. You know, I
Speaker 1: get why mobile gaming is so incredibly hot right now,
Speaker 1: but gosh, looking at the mobile gaming companies here in
Speaker 1: the US, their successes seem to be pretty ephemeral. It
Speaker 1: is that the success can be fleeting, and Zinga comes
Speaker 1: to mind for sure. Yeah, I mean, it's a brutally
Speaker 1: competitive market. It feels more like an investment for right
Speaker 1: now instead of this solid, dependable investment into the future.
Speaker 1: The thing is, these companies are in part responding to
Speaker 1: the mechanics of the Chinese stock exchanges. We'll spare you
Speaker 1: a bunch of the boring details, but basically, because of regulations,
Speaker 1: the stock prices there is almost entirely based on profit.
Speaker 1: So it's not like in the US, where even an
Speaker 1: unprofitable company like Snap can get a really high stock price. Yeah,
Speaker 1: and that means these big conglomerates in China are specifically
Speaker 1: looking for businesses that can generate a lot of profit
Speaker 1: without a ton of capital expense. And even though video
Speaker 1: games are hit driven and definitely risky, it can be
Speaker 1: really profitable. China is the largest video game market in
Speaker 1: the world. Yeah, I've seen the pictures of people crammed
Speaker 1: on the subways, buried in their phones playing games. The
Speaker 1: startup called Outfit seven that makes the mobile app Talking Tom.
Speaker 1: That app makes a hundred million dollars per year. And
Speaker 1: these kinds of profits and gaming app seem almost magical
Speaker 1: in the eyes of these more traditional businesses. How do
Speaker 1: the margins compare so um full full gaming sectors and
Speaker 1: the profit marching could be around certifive to baffle construction
Speaker 1: business few percent. But there's one more thing. The way
Speaker 1: the Chinese stock market works maybe the biggest incentive here.
Speaker 1: A critical metric for investors anywhere is what's called the
Speaker 1: price to earnings ratio, and that essentially tells you how
Speaker 1: highly a stock is priced in relation to the company's profits. Yeah,
Speaker 1: We talked about this number all the time here at Bloomberg.
Speaker 1: It's one of the most important numbers that investors look
Speaker 1: at to see if a stock is actually overvalued. So
Speaker 1: let's say there's a company A in the US in
Speaker 1: company B in China. Both these companies have comparable profiles
Speaker 1: and similar levels of profit, so you'd think that they'd
Speaker 1: have similar valuations in their respective stock markets, but they don't.
Speaker 1: The Chinese company usually is worth a lot more because
Speaker 1: of these various peculiarities in their stock market. The thing is,
Speaker 1: the Chinese stock market is largely closed off from foreign investors,
Speaker 1: so like a savvy hedge fund from New York can't
Speaker 1: just come in and take a look at these companies
Speaker 1: in China and decide they're overvalued and short these stocks
Speaker 1: on the Chinese exchange exactly. I talked to f On Butt,
Speaker 1: an investment banker at the firm Code Advisors. He's become
Speaker 1: somewhat of an expert on these kind of deals. But
Speaker 1: I think you're that's the heart of the matter. You know,
Speaker 1: a lot of these companies, even though their existing businesses
Speaker 1: or maybe a declining because of the factors you've mentioned.
Speaker 1: You know, it's a very closed market. Is China a
Speaker 1: share market. A lot of these companies were trading at
Speaker 1: very high profit multiples. A New York hedge fund can't
Speaker 1: just come in and take advantage of this disparity. But
Speaker 1: imagine you're a Chinese company. If you could somehow get
Speaker 1: an American company to trade on the Chinese stock market,
Speaker 1: it will end up becoming worth a lot more than
Speaker 1: what it was back in the US, simply because of
Speaker 1: the fact that it's trading in China. INCENTI trading in
Speaker 1: the US, right, And it turns out there's a way
Speaker 1: to do that. Let's say that you're the Chinese company
Speaker 1: and you just buy the American firm. That instantly bumps
Speaker 1: up your share price because now you can claim that
Speaker 1: American company's profits as your own. And crucially, you get
Speaker 1: an even bigger bump in your share price than what
Speaker 1: it costs to buy that American startup in the first place,
Speaker 1: because each doll are in profit gives you more market
Speaker 1: value in China than it does in the US. Yes, so,
Speaker 1: even though it feels like these Chinese industrial companies are
Speaker 1: paying crazy amounts for these gaming startups overseas, from the
Speaker 1: perspective of these Chinese businesses, it might actually be a
Speaker 1: pretty good deal while the Chinese stock market is as
Speaker 1: it is. Yes, it's a it's a bit of financial
Speaker 1: engineering in the industry known as barbitage, and that hypothetical
Speaker 1: example that we just talked about has it actually played
Speaker 1: out in reality. There's a really interesting example involving another
Speaker 1: games company called Giant Interactive. Their games were almost exclusively
Speaker 1: for the Chinese market, and it was trading on the
Speaker 1: US Exchange. But the owners saw that it would be
Speaker 1: valued more if it would be listed in China, so
Speaker 1: they took the company private, which means that they bought
Speaker 1: it back from the public investors. Then they merge it
Speaker 1: with a small riverboat cruise company that was trading in China.
Speaker 1: So essentially they took the company from trading in the
Speaker 1: US to China. And what happened. That ferry boat company
Speaker 1: stock is now worth six hundred times when he was
Speaker 1: trading at before the deal happened. It's kind of funny
Speaker 1: imagining what it must be like for these hip young
Speaker 1: startups to suddenly get acquired by these like huge hydrogen
Speaker 1: brock sidemakers in China. What wouldn't have happening after these
Speaker 1: deals go through jag X. The company Lisa bat is
Speaker 1: a good example. Windfil Mantal in chief all Preaching Officer
Speaker 1: and acting chief executive officer Jack x Phil says the
Speaker 1: acquisition has gone well. There was some head scratching among
Speaker 1: some employees at first, but now people are largely supportive.
Speaker 1: I visited the company and they've remodeled their offices and
Speaker 1: atrium was turned into a giant auditorium. There's a bar
Speaker 1: with local beer on tap, pool table, dark board, and
Speaker 1: a dark gaming key for employees to play against each
Speaker 1: other at lunch. A TV studio is where they do
Speaker 1: online broadcast where their subscribers. The biggest risks are probably
Speaker 1: UM your talent pipeline, because either you're a hit factory
Speaker 1: creating new games regularly, and that requires people who deeply
Speaker 1: understand customers, the market, development and creative processes, and UM
Speaker 1: that can sometimes be fragile, so you need to make
Speaker 1: sure that people are happy and taken through the change
Speaker 1: of ownership really carefully. The company is now planning to
Speaker 1: expand in China and looking for other companies to buy.
Speaker 1: I think it's super exciting that UM, you know, we
Speaker 1: might be the start of it. In the West, but
Speaker 1: maybe we'll end up being the hub and there'll be
Speaker 1: other companies with complementary skills where we can help each other.
Speaker 1: We can cross sell through the parent company, we can
Speaker 1: access China and Asia. Since le says company bought jag X,
Speaker 1: the company's stock is up a lot. But there's been
Speaker 1: a new challenge for Lisa and any other Chinese company
Speaker 1: trying to do overseas deals. And what's that The Chinese
Speaker 1: government has been cracking down After a Chinese company spent
Speaker 1: a record two hundred and forty eight billion acquiring overseas
Speaker 1: companies last year, the government's making it a lot harder
Speaker 1: for them to keep doing it. It's part of an
Speaker 1: effort to keep money from leaving China because the country's
Speaker 1: economy is cooling down. They're trying to keep whatever money
Speaker 1: companies are still willing to invest within their own borders. Yeah,
Speaker 1: and they also want to make sure they protect the
Speaker 1: value of their currency. Lisa says all of this is
Speaker 1: definitely having a cooling effect on her businesses, but she's
Speaker 1: hoping that because she got the go ahead to buy
Speaker 1: jag X, she'll have more leeway to make future deals.
Speaker 1: Now it's very hot for if you out um you know,
Speaker 1: medical company, and if you want about enchantment company. Now
Speaker 1: it's almost become impossible. But we were not. Okay, we
Speaker 1: cold of the last trains, so we'll radio Progama companies.
Speaker 1: So now we just want to build our portfolio to
Speaker 1: expand our business in gaming section. And they'll always be
Speaker 1: the adage challenge that some companies don't want to be
Speaker 1: acquired by an obscure Chinese industrial firm they've never heard of.
Speaker 1: The investment banker Offen told me that all things being equal,
Speaker 1: most companies would rather get bought by a company with
Speaker 1: a history and media. That hydrogen peroxide conglomerate that brought
Speaker 1: the maker of Talking Tom. They're now named, bizarrely Jinkie
Speaker 1: Entertainment Culture Company, even though they are chemicals company. They
Speaker 1: changed their name from Jinkie Peroxides Company in the middle
Speaker 1: of last year, so right before they bought the maker
Speaker 1: of the Talking Tom app in January. That acquisition might
Speaker 1: be the last big one we see for a while. Recently,
Speaker 1: there's been more deals that have gone south. The movie
Speaker 1: studio behind Dallas Buyer's Club is involved in a lawsuit
Speaker 1: after an aluminum smelter pulled out of a deal to
Speaker 1: buy them and Dick Clark Productions, which produces events like
Speaker 1: the Golden Globes. It was going to be bought by
Speaker 1: China's largest real estate developer, but that deal fell apart two.
Speaker 1: When I last spoke to Lisa, the deal she had
Speaker 1: been trying to finish head and closed. In a text message,
Speaker 1: she said she was going to have to come back
Speaker 1: to London for more negotiations. So, Adam, I guess we're
Speaker 1: still a year or two into this what it feels
Speaker 1: like a kind of a risky experiment, But what do
Speaker 1: you think is going to happen at the end. It's
Speaker 1: really bizarre and it's hard to imagine that it can
Speaker 1: continue really healthily. There are companies that have been able
Speaker 1: to transform themselves here and there, but these are really
Speaker 1: peculiar deals that are largely based on financial engineering more
Speaker 1: than any kind of passion to get into media entertainment.
Speaker 1: And so it does feel a bit like a bubble, yeah,
Speaker 1: kind of like the I T bubble of early two
Speaker 1: thousands maybe in the US. And as as long as
Speaker 1: the game companies are performing well and giving the big
Speaker 1: conglomerates the profits that they want, maybe it'll work out fine,
Speaker 1: but as we know with gaming, that's not always the case,
Speaker 1: and then they're gonna have to figure out what to do.
Speaker 1: By the way, that Slovenian couple that sold their company
Speaker 1: that makes the talking tom ab what are they up
Speaker 1: to now? I think they're very happy. They live in
Speaker 1: Cyprus and they have started environmental nonprofits, so they've gone
Speaker 1: from talking cat game to environmental preservation, amazing, saving the Earth.
Speaker 1: That's it for this week's Decrypted. Thanks for listening. We'd
Speaker 1: love to hear what you thought of the episode. Record
Speaker 1: a voice message and send it to Decrypted at Bloomberg
Speaker 1: dot net, where I'm on Twitter at Satriano and I'm
Speaker 1: at Akio seven. If you haven't already, please subscribe to
Speaker 1: our show on iTunes or wherever you get your podcasts.
Speaker 1: While you're there, please leave us a rating and a review.
Speaker 1: This really helps us get in front of more listeners.
Speaker 1: This episode was produced by Pia gutt, Cary, Liz Smith,
Speaker 1: and Magnus Hendrickson. A big thank you to Nick Summers,
Speaker 1: who edited my story in Bloomberg Business Week. That piece
Speaker 1: takes a closer look at what's going on inside the
Speaker 1: gaming companies that are getting bought up. Alec McCabe is
Speaker 1: ahead of Bloomberg podcast We'll see you next week. Decrypted
Speaker 1: is brought to you by red Hat, whose broad portfolio
Speaker 1: of open source technologies for the enterprise helps you get
Speaker 1: from where you are to where you want to be.
Speaker 1: Red Hat the open technology to help you realize your vision.
Speaker 1: Learn more at red hat dot com, slash Opentech