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Kingsoft Powerword Signs MBO Agreement with Parent

Netease Tech, 7/04/11

An industry source has revealed that senior management at Kingsoft's (3888.HK) Powerword dictionary software subsidiary had signed a management buyout agreement with the company. Kingsoft Powerword and Kingsoft reportedly settled on the framework for the MBO agreement in early April, under which Powerword management - primarily CEO Jia Lin and CTO Wang Haiming - will purchase a 20% stake in Powerword for USD 2.5 mln. Powerword management will raise and pay out the cost of the purchase in several installments between now and October. The first payment has already been made. Kingsoft will continue to hold the remaining 80% of Powerword.

Following the new agreement, Kingsoft will gradually withdraw its remaining funding from Powerword in order to ensure the company's financial independence. At the same time, Kingsoft will issue Powerword an RMB 10 mln no-interest loan to cover the company's day-to-day operations for the short term.

Jia Lin confirmed the report of the MBO, but declined to offer any comment on the figures specified.

The same industry source also revealed that Powerword was in the process of approaching investors regarding plans to raise USD 8 mln to 10 mln in strategic funding. The framework agreement has essentially finalized, the source said, and is now undergoing the necessary legal review. In this round of financing, investors have assessed Powerword as having a value of roughly USD 25 to 30 mln -- which is to say that the current round of funding will involve selling 30% of the company, all of which will reportedly come from Kingsoft's stake rather than the stake purchased by Powerword management. Kingsoft CEO Kau Pak Kwan once verbally promised Powerword management that if the company succeeded in raising financing, he would award management with a 10% equity stake in the company. Should this happen, the ownership structure of Powerword, post-financing, could be 30% Powerword, 30% investor, and 40% Kingsoft.

Kingsoft Powerword plans to establish a seven- or nine-seat board, one seat of which will be granted to future investors. Of the remaining six or eight seats, one will be held by Kau, one or two by Kingsoft, and the remainder by Powerword management.

Previously, in discussing the state of Powerword's revenues, Jia said that the company saw net profits of RMB 3 to 4 mln last year through "traditional channels" (meaning the sale of licensed software), and advertising revenues "in the high tens of millions, but under RMB 100 mln." Powerword will reportedly partner with a media company to launch online educational programming, for which the company will bring on experienced offline agents and training companies through whom it will charge tuition.

Editor's Note: For more information on this topic, please see "Kingsoft to Spin Off Powerword, WPS," MD 3/03/11 issue.

Keywords: Wang Haiming dictionary Kingsoft MBO Internet funding software PowerWord 3888.HK Jia Lin KAU Pak Kwan profit revenue

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