Updated on Jan. 13, 2009

Sina to Acquire Focus Media's LCD Ad Network for $1.27 Billion

Deal Gives Focus Much-Needed Cash but Critics Say Sina Will Have Trouble Integrating Online and Outdoor Ad Sales

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SHANGHAI (AdAgeChina.com) -- Two of China's largest new media companies have forged a deal that will alter the landscape of that country's digital media industry.

Sina Corp., China's largest internet portal, will acquire some of the most valuable advertising assets of China's largest digital media company, Focus Media Holding, for $1.27 billion in exchange for 47 million Sina shares. The deal, which includes Focus Media's network of liquid crystal display (LCD) monitors, poster frames and in-store advertising displays, is predicted to be finalized in the first half of 2009.

As of September 30, 2008, Focus Media's digital out-of-home advertising network had approximately 120,000 LCD display and digital frames in its commercial location network, approximately 56,000 LCD displays in its in-store network and approximately 300,000 advertising in-elevator poster and digital frames, installed in over 90 cities throughout China. It also has about 250 outdoor LED billboard displays in Shanghai and Beijing. The Shanghai-based company's assets reach over 150 million urban consumers on a daily basis, according to Focus Media.
Focus Media founder and chairman, Jason Jiang, in Shanghai
Focus Media founder and chairman, Jason Jiang, in Shanghai Credit: Normandy Madden
The businesses that will be acquired by Sina accounted for 52% of Focus Media's revenues and 73% of its gross profit in the first three quarters of the year.

Focus Media will retain its internet advertising division, the movie theater advertising network portion of its commercial location network and some traditional billboards.

Focus Media was founded in 2003 by a former ad salesman Jason Jiang, who is now the company's chairman. It quickly grew into China's largest outdoor digital media operator, through organic growth, an initial public offering on NASDAQ in 2005 that raised $172 million and an aggressive acquisition strategy. Following its IPO, a well-funded Focus snapped up rival companies like Shanghai Framedia Advertising, Target Media and Allyes Information Technology.

Focus-operated screens have popped up all over China in the last five years -- in nearly ever elevator and lobby, as well as supermarkets, buses, airports, in-flight entertainment systems, railway cabins, parking lots, restrooms, hairdressing salons, and shopping centers. Focus Media's total revenues grew 63.7% year-over-year and 6.2% quarter-over-quarter to $224.8 million, during the quarter ending Sept. 30 2008.

But that's the end of its good news. Focus Media has faced significant challenges during the past few months, partially caused by a global recession that has slowed ad spending in China. Focus Media's stock has fallen from a 52-week high of $59.37 to $9.20 on Dec. 22, 2008.

Earlier this year, the company came under government fire after its mobile advertising network was accused of sending unwanted "spam" messages to 200 million China Mobile and China Unicom subscribers. Its mobile ad revenue fell sharply after it agreed to ban spam and that division never fully recovered. On Dec. 9, 2008, Focus Media also shut down its interactive marketing business entirely.

The company is also facing a backlash to its ubiquitous screens. Just two years ago, Focus Media "was almost a synonym of the new media concept in China," said Chen Li, an executive at Z. H. Studio, a media and marketing consultancy in Beijing. Today, "people are not looking to be entertained, merely as recipients, by those unavoidable ads. Consumers like to get more active participation with the media."

Sina, meanwhile, hopes Focus Media's assets will allow it to diversify its content, including news, blogs, entertainment and advertising as well as its reach, currently limited to the internet.

"We believe that this business combination will significantly extend our media reach and influence, reinforcing our position as a partner of choice in new-media advertising in China," said Sina's president and CEO, Charles Chao.

Dick Wei, a China technology analyst at JPMorgan in Hong Kong, said the deal will make cross-selling between Sina's existing assets and its new outdoor digital sites easier, because Focus and Sina "have a similar large brand advertiser base."
Focus Media screens dot elevator lobbies throughout China
Focus Media screens dot elevator lobbies throughout China Credit: Normandy Madden
Rather than helping Sina, he predicts the deal will "drag down" the portal's high growth rate. Many of Focus Media's advertisers in China run TV spots on its outdoor digital screens, which are usually located in high-traffic areas such as elevator lobbies, shopping center plazas and retail outlets.

As a result, advertisers' spending on Focus Media's assets will "track more in line with the growth of traditional TV advertising, roughly 10% in 2009, vs. our 22% forecast for Sina's online advertising next year."

The idea of "a media conglomerate" has not worked well in China, Mr. Wei added. Focus Media's "original plan of cross-selling between internet, in-store, and elevator lobby business has not shown much success. [Focus Media] recently began to restructure its in-store business with $200 million write-offs expected in the fourth quarter of 2008, and we believe lots of attention would be required."

James Lee, a Boston-based China tech analyst at Sterne Agee, agreed the deal is "not good" for Sina. Focus Media has more than 3,000 advertisers, while Sina has about 600. "Sina hopes to do more cross-selling, but decision-makers buying internet ads are not the same as those buying LCD ads."

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