In China, it’s been a different story so far.
There, New York firms like
Simpson Thacher & Bartlett
Davis Polk & Wardwell
Skadden, Arps, Slate, Meagher & Flom
have built a commanding lead advising Chinese technology start-ups. Many of those companies choose to have U.S. initial public offerings because of the larger community in America of tech-savvy investors and analysts, as well as the fact that the New York Stock Exchange and Nasdaq, unlike the major exchanges in China or Hong Kong, do not require listing companies to have a multiyear track record of profitability.
Of the 41 U.S. IPOs by Chinese companies in 2010, Simpson alone advised the issuers or the underwriters on 18 of them. Skadden was on 17. Wilson Sonsini, which launched a Shanghai office in 2007, managed just one.
There were 12 such IPOs in 2011. But that market has, of course, been in a deep freeze for the past year, with just one U.S. IPO for a Chinese company so far in 2012: the March New York Stock Exchange listing of Skadden client Vipshop Holdings Ltd., a Guangzhou-based online retailer which raised almost 40 percent less than the $118 million it had sought. Beset by investor concerns over the quality of their financial disclosures, many U.S.–listed Chinese companies have seen their share prices plummet. Several have been the targets of shareholder class actions.
But Silicon Valley firms are maneuvering now to try to make sure they get a bigger piece of the action when the market bounces back. Cooley opened its first overseas office in Shanghai last December, with partners Bradley Peck and Patrick Loofbourrow relocated from San Diego. Another Silicon Valley firm,
, is currently awaiting approval from Chinese authorities to open its first international office in Beijing.
Bradley Peck, Cooley’s managing partner in Shanghai, says the same strategy that has succeeded for the firm back home—working with companies from start-up to IPO—will also work in China, especially given the firm’s long track record in the tech sector. Tech companies that Cooley has advised from the very beginning include mobile chip maker Qualcomm Inc., graphics giant Nvidia, and Internet review portal Yelp Inc.
“I do think that history, that experience, and all the knowledge that comes with that, is an advantage,” he says. “You want someone who’s been there, done that.”
But the New York firms say that, in China, they are the ones who have been there and done that.
“You have to remember that firms like Davis Polk and our peer firms have been out here since the 1990s,” says Davis Polk Hong Kong partner James Lin, whose firm advised seven Chinese companies on U.S. listings in 2010. “So we’ve established ourselves in the U.S. capital markets space well before the peak years for IPOs [in 2010 and 2011]. I think that’s given us an advantage.”
Certain partners have become highly identified with China’s tech sector. Skadden’s Julie Gao has represented leading search engine Baidu.com, video site Youku.com, and retailer e-commerce China Dangdang in IPOs. She is also now acting for social media site YY.com on a planned IPO. Simpson Thacher’s Leiming Chen and
Kirkland & Ellis
’s David Zhang have also garnered long lists of deals in the space.
Lin notes that the leading Wall Street firms have substantial Silicon Valley practices and relationships with venture capital firms of their own to leverage in China. And he doesn’t think it’s just Silicon Valley firms that work with early-stage companies. “We do that, too,” says Lin.
Former Wilson Sonsini associate Brent Irvin, now general counsel for Chinese Internet portal and messaging giant Tencent Holdings Ltd., says New York and London firms are definitely the market leaders in the region. But he thinks there are areas where Silicon Valley firms will be competitive, such as technology and intellectual property licensing.
Tencent turned to Wilson Sonsini this summer when it struck a deal to bring to China a licensed online version of Activision Blizzard Inc.’s popular
Call of Duty videogame series. Irvin says the company has also used Wilson Sonsini and other Silicon Valley firms on angel investments it has made in U.S. tech start-ups.
“For venture capital–type investments, licensing, IP deals, we definitely have California firms on our short list,” he says.
But Wilson Sonsini, the best known of the Silicon Valley firms and the earliest of them to move into China, is now taking a very different path from its West Coast peers. Its China practice partners are now almost all former lawyers with Wall Street firms.
Weiheng Chen, the Hong Kong–based head of the China practice for Wilson Sonsini, joined the firm two years ago from
Milbank, Tweed, Hadley & McCloy
, where he was a counsel. He also previously worked at
Sullivan & Cromwell
. Last year the firm brought on board Shanghai partner Kefei Li, a former Skadden counsel. Earlier this year, Davis Polk counsel Zhan Chen also came aboard as a Wilson Sonsini Shanghai partner.
Chen says the firm is also looking at a broad range of industries in China, such as consumer goods and health care. “The growth sectors in the U.S. in the past decades have been associated with tech-related sectors, but that is not the case in China,” he says.
Before Chen came on board, Wilson Sonsini’s China efforts had been led by partner Carmen Chang, who worked primarily in the firm’s Palo Alto headquarters. Chang
left the firm in February
to divide her time between the Silicon Valley office of Washington, D.C.’s
Covington & Burling
, where she became a senior counsel, and venture capital firm New Enterprise Associates, where she joined as a senior adviser. Two other China partners, Michelle Edwards and Eva Wang, also moved from Wilson Sonsini to Covington.
Chang, who is largely retiring from active law practice, says Chinese clients had been receptive to Wilson Sonsini’s Silicon Valley-style practice, which focused on having ongoing relationships with companies and advising them on their day-to-day operations as well as major transactions. She still thinks this approach can work for firms like Cooley. But she says the earlier investment in China by Wall Street firms has given them an advantage in the market; they have great lawyers but also more of them.
“In the first five years or so, we never had more than four or five lawyers on the ground in all of China,” she says. During the same time, many of the New York firms had dozens in the region and most have even more now. Chang says there were times when Wilson Sonsini had to hand off major deals to the Wall Street firms because they lacked the capacity.
At the same time, she also thinks there is a generational shift in the legal market towards Chinese-born, Western-trained lawyers with ties to bankers and entrepreneurs with similar profiles. She thinks Chen is a perfect example of that new breed of young, agressive lawyer, and she thinks he will serve Wilson Sonsini well. ”I hired Weiheng because I knew I was leaving and I felt it was very important for the law firm to have people with that background,” she says.
Where the China techonology market is going is, of course, still a big question mark, and the current capital markets downturn has given all the law firms competing in China’s tech space some unwelcome breathing room.
“The focus right now isn’t really on competition [from new firms] but when the market is going to come back,” says Skadden’s Gao.
But Chen thinks that market may never come back to what it was. He thinks China and Hong Kong have more of their own sophisticated tech investors now, including some relocated from outside the region. Moreover, Chinese companies now realize that U.S. IPOs aren’t just easy money but also carry high compliance costs and considerable litigation risk.
“I am not saying that the Chinese companies will stop considering U.S. IPOs,” he says, “but I don’t see that U.S. IPOs will be the mainstream going forward.”
Instead, he thinks more competition in the future will focus on Hong Kong listings. Wilson Sonsini, like most of the Wall Street firms, has recently launched a Hong Kong law practice with the addition in September of partner Khoon Jin Tan, who most recently was a managing director in the China investment banking group of Macquarie Capital.
Cooley’s Peck notes, however, that all markets are cyclical, and Chinese companies’ concerns about the U.S. may eventually be replaced by those about Hong Kong as the region goes through its own ups and downs. As a result, U.S. IPOs may return in popularity again.
“People love to predict,” he says. “We just finished a [U.S.] election cycle where a lot of people ended up with egg on their faces because of their predictions.”
Beginning in the 20th paragraph of this story, comments from an anonymous source have been replaced with comments from an additional interview with Carmen Chang.
Update, 11/19/12 2:30 EST: Comments from Carmen Chang have been added to the 22nd paragraph of this story.