Renren In Search Of Identity As Its Stock Surges On Lawsuit Settlement

Key takeaways:

• A 45% surge in shares of Renren, once pegged as the ‘Facebook of China,’ earlier this month was fueled by settlement of a shareholder lawsuit
• Despite a $600 million market value after the jump, company is still in search of a long-term business model

By Shirley Lau

Giving shareholders something to be excited about has not been a forte of Renren Inc. RENN, whose heady days when it was once billed as the “Facebook of China” are now a distant memory. So the sharp surge in its stock price earlier this month was quite an exception in the Beijing-based company’s decade-long history as a U.S.-listed company.

Whether or not that vigor will last, however, is a different matter.

On Oct. 8, Renren shares soared 45%, sending its market value above $500 million for the first time in more than three years. The surge came on the heels of news that the company has agreed on a settlement worth $300 million or more – one of the largest of its kind in U.S. history – with shareholders over allegations of corporate misconduct.

The outcome wasn’t a big surprise, at least for shrewd investors who have helped push up Renren’s stock steadily in recent months by buying shares in anticipation of the settlement. When news of the deal broke, still more investors snapped up the shares, apparently hoping to get some of the cash in a future payout.

The stock has now stabilized in the mid-$20s, representing a new chapter for a company whose shares spent much of the last three years below $7 and even briefly traded below $1 as recently as last year – putting it at risk of being de-listed.

While the turnaround looks impressive for a company whose various businesses have failed or been spun off in recent years, the stock surge looks mostly tied to the settlement and has little to do with the company’s underlying business. At the business level, Renren has shown itself to be a fickle company that often changes direction, with a penchant for dabbling in different fields.

That’s set it on a meandering journey over the years that’s been bumpy to say the least. And there’s no obvious sign that things will change in that regard once the settlement money is paid out.

When Renren made its New York IPO in May 2011, its flagship product renren.com had a whopping 117 million active users, and was tipped to become one of China’s social media giants. Despite being unprofitable at the time, it raised over $777 million in the listing whose shares rose about 28% on their first trading day, giving the company a market value of more than $5 billion.

But the good times didn’t last long. By February 2012, Renren’s stock had plunged by two-thirds as its operating loss expanded to $91.7 million in 2012 from $30.2 million the previous year. Its market value was down to $1.25 billion by 2013, and in 2017 the figure dropped further to just $412 million.

Unmet Expectations

What went wrong? By and large, it was a tale of expectations unmet. Investors had high hopes Renren would become China’s Facebook, since the U.S. social media giant is itself blocked in the country. But the site, originally an exclusive student-focused platform, had already been losing popularity, as old users complained it had lost its “purity” after becoming accessible to everyone.

A livestreaming platform launched in 2016 completely changed the site’s landing page, prompting many to leave and embrace current leaders like Weibo (WB.US) and WeChat. In 2018 when it was sold to a Beijing company for just $20 million, renren.com’s active users totaled just 180,000.

It wasn’t only bad news for Renren all that time. Having plummeted from $118 million in 2011 to $41 million in 2015, Renren’s annual revenue rose back to $63 million in 2016 when it launched the livestreaming platform. Its revenue further jumped to $202 million the following year with the launch of a used car business. But that new venture also pushed up the company’s operating loss to $113.4 million in 2018 by which time Renren’s market value had shriveled to $105 million.

In trying to stay alive and thrive during the years when its networking platform was in decline, Chairman Chen Yizhou steered Renren in a new direction by buying stakes in startups that had little to do with the social media. By the end of 2015, its balance sheet contained nearly $811 million worth of long-term investments in 55 portfolio companies and investment funds, including a $242 million investment in the peer-to-peer student lender Social Finance Inc.

In effect, Renren had morphed into a venture fund rather than operator of an actual business.

The investments offered an opportunity for Renren’s top executives to make potential gains, which spawned a lawsuit as investors argued they had no access to information about the private companies in Renren’s investment portfolio. Meantime, the stock continued to trade at relatively low prices as Renren’s operating losses mounted.

Taking advantage of the low stock price, Chen attempted to take Renren private in 2015. His low-ball offer enraged shareholders who said it dramatically undervalued the company’s investment portfolio, and the deal eventually fell through.

But Chen and other top executives soon came up with an alternate plan. They set up Oak Pacific Investment (OPI) as a subsidiary to receive Renren’s portfolio of startup stakes and then arranged to spin Oak Pacific off. The deal closed in 2018, with Renren shareholders getting $9.19 in cash for each of their American depositary shares (ADSs).

The spinoff sparked a second investor revolt arguing the $500 million value given to OPI was “several hundred million dollars” short of the fair value.

Following the settlement of that lawsuit earlier this month, litigation firm Reid Collins & Tsai LLP said the outcome “sets powerful legal precedent protecting investors from cross-border fraud and financial misconduct.” Renren has only published a press release containing the facts and technical details of the settlement without further comment.

Today, Renren is left with several unprofitable U.S.-based software as a service (SaaS) businesses, and it remains to be seen what plans Chen has for the company’s future. Its latest annual report showed it posted just $18.1 million in revenue last year, and an annual net loss of $19.2 million.

Explaining why renren.com flopped, Chen said in a previous interview his business slowed down not only because customers were attracted to the newer brands, but also because he himself became distracted from the original business. What is clear is that Chen, who has a reputation as a savvy deal maker, is never short of business ideas. That may be the main source of the company’s value, at least for now, as Chen looks for his next pursuit.