AsiaInfo and Linkage to merge into $1.8 billion company

On the eve of Linkage's US IPO, competitor AsiaInfo announces that the two companies will merge, creating an entity valued at $1.8 billion.

AsiaInfo will merge with Nanjing-based software development firm Linkage Technologies in a cash and stock deal that will create a company with a market capitalisation of more than $1.8 billion.

Linkage shareholders will receive $60 million in cash and 26.8 million AsiaInfo shares as part of the deal and will end up owning 35.8% of the new company, while AsiaInfo shareholders will own 64.2%.

Steve Zhang, AsiaInfo's president and chief executive officer, will assume the same role for the merged entity, which will be called AsiaInfo-Linkage. The enlarged company's board of directors will comprise nine members, six from AsiaInfo's board and three appointed by Linkage's board.

AsiaInfo provides software and customer solutions to China's telecom carriers, as well as security products and services to small, medium and large Chinese enterprises. It began operations in the United States in 1993 and moved its major operations to China in 1995. The company has a dominant position in China within telecom billing systems and business intelligence software. AsiaInfo gets 85% of its revenues from Chinese telcos China Mobile, China Telecom and China Unicom, which are all in aggressive spending mode. AsiaInfo's biggest customer is China Mobile.

Nanjing-based Linkage was founded in 1997. It is primarily a software development firm that has been growing revenues at a faster pace than AsiaInfo, albeit from a smaller base. The three Chinese telcos are also Linkage's main customers. The merger definitely gives scope for both margin and multiple expansion, sources say. AsiaInfo said the deal will close by the second quarter of next year and will be positive for earnings in 2010.

The timing of the current deal is interesting as Linkage was in an advanced stage of an initial public offering on the New York Stock Exchange. The company was in the middle of a roadshow and the deal was due to be priced later this week. The IPO was set to raise around $130 million of which $30 million was earmarked for research and development. AsiaInfo was the main comparable for Linkage and seekingalpha had commented recently that Linkage would provide an alternative for investors seeking exposure to domestic service providers to China's telecom industry. The IPO was being led by Barclays Capital and Citi.

A potential transaction between AsiaInfo and Linkage was always a possibility, sources say, as both companies are very familiar with each other. It is possible that the pricing indications Linkage got for the IPO provided a benchmark for negotiations between the two companies.

Bank of America Merrill Lynch and the Hina Group provided financial advice to AsiaInfo, while DLA Piper and Han Kun Law Offices provided legal advice. Barclays Capital acted as financial adviser to Linkage, while Latham & Watkins and Global Law Office provided legal advice. 

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