Liz Gannes

Recent Posts by Liz Gannes

What Happens When Chinese Businesses in the U.S. Collide With U.S. Businesses in China?

What might freak out Facebook these days?

Well, what about if Chinese social networking company Renren, which had a huge IPO yesterday, bought Myspace?

That’s not likely to happen, said multiple sources close to the situation, since Renren hasn’t yet submitted a bid for the one-time giant of American social networking. Myspace is now on the block.

But such a development had worried some at the Silicon Valley social networking behemoth, when rumors flew recently that the company known as the “Facebook of China” might have expressed interest in Myspace.

It did, sources said, although it has not moved beyond that and it seems likely that a private equity buyer will acquire the site from News Corp.

But the fact that Renren was able to raise $743.4 million on an American stock exchange, saying it may use the money for “potential strategic acquisitions and investments,” means it certainly has the potential to buy its way onto U.S. turf.

That is obviously interesting to many and troubling to some.

On Wednesday, Renren saw its shares enter the market at the top of an estimated range and then end the day up 28 percent. Today, the stock has lost its footing a bit, losing 10 percent in morning trading.

Renren’s IPO comes at a time when Facebook is preparing to enter into China through a likely partnership with Baidu. As we’ve reported, the social networking giant’s current plan would include censoring its site for China-based users to comply with the Chinese government.

Facebook also plans to allow international users to connect to Chinese users provided they confirm they are aware that the Chinese government may be monitoring their activities.

These moves will undoubtedly be highly controversial.

Facebook, which is currently blocked in China, has portrayed itself as a force of openness in the world, and submitting to the demands of the Chinese government is ethically questionable.

Renren, on the other hand, censors its users as a matter of course. In fact, its own IPO prospectus warned investors that repercussions from any potential failure to censure properly was a risk factor they should consider.

Nonetheless, U.S. investors, persuaded by the seductive combination of social networking and China, couldn’t resist buying the stock. That’s even though Renren, in addition to being complicit in blocking freedom of speech, is not profitable and has had “accounting weaknesses.”

But now Renren is $743 million richer (actually $853 million richer, with a private placement from investors, including China’s Alibaba Group timed to the IPO), capital it can put to work both inside and outside of China.

It’s not that Chinese start-ups fueled by U.S. dollars are a new thing–Renren was funded by DCM and General Atlantic. And Silicon Valley venture capital firms are behind many Chinese Internet companies, which have long abided with censorship and engaged in pay-to-play user acquisition.

Renren may not have the same heft as Facebook–it has 31 million active users compared to Facebook’snearly 700 million, and it faces major competition in China.

But sources said Facebook is concerned about what Renren can do with all this cash. As I wrote in a previous story:

Sources close to Facebook said that Renren’s U.S. fundraising, in particular, is a significant motivator for Facebook to launch its China offering sooner rather than later.

“I would not discount the need for Facebook not to sit by and watch a significant competitor gain that much advantage,” said one person close to the situation.

Now that Renren’s IPO has happened, the question of how this all will play out is less hypothetical.

(Full disclosure: News Corp. also owns Dow Jones, which owns this site. And please see the disclosure about Facebook in my ethics statement.)

Flag image by Flickr user Philip Jägenstedt.

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