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