Huayi Brothers failed to acquire Hero Entertainment. Its frequent successes and failures in mergers and acquisitions hide greater crises.

After being suspended for 74 days, Huayi Brothers (300027.SZ) finally issued an unexpected announcement: the termination of the acquisition of Hero Entertainment (430127.OC).

"It's so surprising," was the first reaction of many people in the industry when they heard the news.

On November 24, Huayi Brothers announced that the target company of the major asset restructuring was "Hero Entertainment". Two weeks later, Huayi Brothers announced the termination of the acquisition. The reasons for the termination are as follows: Since the target company is a publicly listed company and the target assets involve many shareholders, the company and the counterparty failed to reach a consensus on the overall valuation of the target assets of this restructuring and the transaction price after many negotiations.

Senior investment bankers analyzed that the biggest reason for the failure of this transaction was valuation. Based on the stock price before the suspension, Hero Entertainment's market value has exceeded 15 billion, an increase of nearly 6 billion from the first time Huayi Brothers acquired its shares a year ago. If Huayi Brothers refers to the pricing on the New Third Board, Huayi Brothers will obviously pay a higher price.

An investment banker close to the market revealed to Jiemian News that the relationship between Hero Entertainment and Huayi Brothers is generally good, but the most difficult thing to negotiate in an acquisition is valuation. "It is common to fail to reach an agreement on the price in acquisitions, not to mention that the e-sports industry has been extremely hot recently. The original shareholders of Hero Entertainment may ask for a price higher than 15 billion."

In fact, Hero Entertainment's performance is not as good as it seems. Although the 2016 semi-annual report achieved operating income of 377 million yuan and net profit of 217 million yuan, there are also common problems of game companies hidden behind it: frequent mergers and acquisitions and performance uncertainty.

In June and July 2015, it acquired 20% and 80% of the shares of Changyou Cloud respectively, thereby expanding its asset scale to 3 billion, of which goodwill generated 896 million, accounting for 28% of total assets.

Although the company's performance has been growing in the past two years, as a game company, the core games are only a few products such as "City of Guns" and "Shadow Blade 2". Although the annual report disclosed that "City of Guns" currently has 27.5 million MAUs, 1.8 billion logins throughout the year, 136 million registered users, and a monthly turnover of over 100 million, but the game is not found in the current iOS charts.

Huayi Brothers invested in Hero Entertainment early on, which was also the largest investment of Huayi Brothers in the past three years. In November 2015, Huayi Brothers announced the acquisition of 20% of Hero Entertainment's equity for 1.9 billion yuan. Of course, the investment in Hero Entertainment also brought Huayi considerable benefits. Data shows that Hero Entertainment achieved operating income of 377 million yuan and net profit of 217 million yuan in the first half of 2016, with a net profit margin of 57.56%. Compared with Huayi's net profit of 358 million yuan in the same period, Hero Entertainment contributed 41.29 million yuan in investment income to Huayi in the same period, accounting for 11.5%, making great contributions.

However, financial gains may be the only benefit that Hero Entertainment has brought to Huayi Brothers. The so-called film-game linkage brought about by the acquisition has left many people inside the company confused, not just laymen. In the eyes of industry insiders, the film-game linkage may be just a concept. Wu Yimin, general manager of Caesar Holdings, believes that the concept of "film-game linkage" may have been a false proposition in the capital market in the eyes of industry insiders.

"So far, there are very few successful cases of game adaptation into movies, and there are also many failed cases of IP adaptation into games in the market." Zhang Qing, general manager of MiLi Pictures, also believes that games and movies are completely different in production and are quite difficult to implement. Judging from the previous cooperation between Huayi Brothers and Hero Entertainment, it mainly stayed at the level of celebrity endorsement. Huayi's Lunar New Year film "Old Cannon" was released, and it authorized Hero Entertainment and its "All People's Gunfight" to use the materials of "Old Cannon". The chief creative officer of "All People's Gunfight" is Chen He of Huayi.

Therefore, even if the acquisition is successful, Huayi will only get financial gains, and there is no strategic interaction at all. What is most annoying is that the former investee has now become the gaming company with the largest market value on the New Third Board. "I can't afford it anymore" may be the most realistic portrayal now.

It has to be said that Huayi’s failure in this acquisition has put it into a bottleneck that all companies will encounter in their development: where is the future?

Huayi Brothers has lost its advantages in many industries. The company's traditional film industry has exposed its disadvantages through the "war of words" between Feng Xiaogang and Wanda Cinema Line. In terms of distribution, it has not gained the upper hand in direct confrontations with companies such as Enlight Media (300251.SZ). In addition, a film and television town that requires a lot of money is under construction. It seems that Huayi Brothers is experiencing the most painful moment since its listing.

The culprit behind all this may be Huayi Brothers itself.

As one of the first batch of listed film and television stocks, Huayi Brothers deservedly won the reputation of "the first film and television stock on the Growth Enterprise Market". At that time, this title was a recognition of Huayi Brothers' status and capabilities in the industry.

The development history of Huayi Brothers is full of strong "brotherhood". When brothers Wang Zhongjun and Wang Zhonglei founded the company in 1994, they mainly engaged in advertising business, and then switched to the film and television entertainment industry in 1998. The first film they shot was "Endless" directed by Feng Xiaogang. At that time, Huayi Brothers still had a strong advertising gene. The investment in the film was 3 million yuan, of which nearly 2 million yuan was advertising sponsorship, and the investment received a rich return.

Since then, Huayi Brothers has used its 20 years of experience in the industry to make Li Bingbing, Huang Xiaoming and other top actresses in the circle famous. In addition, it has first-line stars and directors such as Ge You and Feng Xiaogang, so the company can be said to be able to call the wind and rain.

But all this came to an abrupt end in 2014. At that time, the involvement of capital in the film and television industry made various stars start to move and set up their own studios, which was unexpected for Huayi Brothers, which focused on "brotherhood". In addition, Wanda Cinema Line and the rising star Enlight Media also made Huayi Brothers uneasy.

Facing the crisis, Huayi Brothers chose to go for mergers and acquisitions. Industry insiders analyzed that in recent years, Huayi Brothers has been constantly extending its tentacles into other fields, causing it to lose its advantage in the film industry.

In recent years, Huayi Brothers has had more than a dozen mergers and acquisitions, large and small, covering a wide range of industries including film, home entertainment, real estate, Internet software, consulting, etc. On the positive side, the continuous mergers and acquisitions have brought Huayi good returns, first of all, the growth of asset scale.

Director Feng Xiaogang repeatedly said in his previous open letters that Huayi is a "small company", but in fact, through continuous mergers and acquisitions, Huayi is not small, but unexpectedly "big". At the end of 2014, Huayi's total assets were only 9.819 billion yuan, and its net assets were only 5.68 billion yuan. The 2016 third quarter report released this year showed that the total assets of the listed company were 19.655 billion yuan, and the net assets were 10.147 billion yuan, which was more than doubled compared with two years ago.

On the other hand, Wanda Cinema Line, the other party in the war of words, has always been known for its heavy asset model, but surprisingly it is much smaller than expected. As of the third quarter of 2016, Wanda Cinema Line's total assets were 16.923 billion yuan, 16% less than Huayi's 19.655 billion yuan; Wanda Cinema Line's net assets were almost the same as Huayi Brothers, at 10.147 billion yuan.

Through continuous mergers and acquisitions, Huayi Brothers' asset scale has increased rapidly, along with financial assets such as goodwill, long-term equity investments and available-for-sale financial assets. These three items accounted for 49.21% of the 2016 third quarter report.

Source: Wind Information, Jiemian News Research Department Unit: 100 million yuan

The disadvantages of continuous mergers and acquisitions include the increasing proportion of financial assets and the gradually declining performance. Huayi Brothers has a similar asset scale to Wanda Cinema Line, but the profits are very different. As of the third quarter of 2016, Huayi Brothers' revenue was 2.152 billion yuan and its net profit was 738 million yuan; while Wanda Cinema Line's revenue was as high as 8.437 billion yuan, and its net profit was about 50% higher than Huayi, reaching 1.148 billion yuan.

Source: Wind Information, Jiemian News Research Department Unit: 100 million yuan

This is the problem of Huayi Brothers. They keep acquiring companies, but they don’t generate synergy. They only increase the size of their assets but don’t increase the company’s core competitiveness. The company keeps trying and failing, but it loses itself in the process of searching.

In addition to the aforementioned Hero Entertainment, Huayi Brothers' other large acquisitions include spending 1.05 billion yuan to buy Feng Xiaogang's Mela Media, and spending 756 million yuan to acquire Dongyang Haohan, a shareholding platform of celebrities such as Angelababy.

This series of acquisitions highlights the "passiveness" in terms of timing. These acquisitions took place at the end of 2015, when artists were setting up their own studios. Huayi, which started out as an artist management business, had to use the means of binding to retain artists. The artists bound this time were not the top male and female stars made famous by Huayi Brothers, but more popular stars such as Li Chen, Feng Shaofeng, Angelababy, Zheng Kai, etc.

In addition, Huayi Brothers has also acquired other companies one after another, with both large quantities and large amounts, but there is no clear main line, and the acquired companies are not the top companies in the industry, so naturally the performance brought is not satisfactory.

But during the period when Huayi Brothers was attacking everywhere, Light Media and Wanda Cinema Line also did their best to seize market share.

Wanda Cinema's M&A path in recent years is quite clear. In June 2015, it spent 2.24 billion yuan to acquire Australian cinema company HG Holdings; in the same month, it spent 2.2 billion yuan to acquire 15 cinema companies including Muwei Fashion and Chongqing World Trade; in July 2016, it spent 1.87 billion yuan to acquire online ticketing website Time.com. In addition, around 2014, Ye Ning, who was still in Wanda at the time, was mainly responsible for uniting the five major distribution and production companies to establish Wuzhou Film Distribution, officially competing with Huayi Brothers for the "rice bowl" and quickly gaining a foothold in the industry. In 2015, its main film "The Pancake Man" won the fifth place in the Chinese-language film in 2015 with a box office of 1.16 billion yuan; in addition, its releases "Go Away! Tumor King" and "Charlotte's Troubles" both achieved good box office at low cost.

According to Endata, Wuzhou Distribution ranked second among private distribution companies in the first half of the year with a box office of 1.63 billion yuan. On this list, Huayi Brothers ranked only ninth.

Source: Entgroup, Jiemian News Research Department

Let's look at another competitor of Huayi Brothers, Enlight Media. Since last year, Enlight Media has focused its main efforts on film and television production. The company has invested in many successful films such as "The Mermaid", and Wang Changtian has also stated in many public occasions that he will firmly engage in the business of film distribution in the future.

In the first half of 2016, Enlight Media ranked third among private distribution companies with 560 million yuan of revenue from 5 films. The 2016 interim report showed that Enlight Media achieved operating income of 722 million yuan, a year-on-year increase of 74.27%; net profit of 581 million yuan, a year-on-year increase of 216%. Enlight Media, which focuses on film and television production, is obviously much more effective than Huayi Brothers' "wide-ranging" approach.

Source: Company announcement, Jiemian News Research Department

A market insider who has been engaged in film and television industry analysis for a long time told Jiemian News that Huayi Brothers' annual single-digit revenue growth shows that the company's development strategy is out of sync with the current environment. "In terms of distribution business, Huayi has been gradually overtaken by Guangguang, and Huayi's stock price also reflects investors' ideas." Indeed, Huayi Brothers' performance in recent years has been quite weak. In the first half of this year, the company's net profit was only 358 million yuan, a year-on-year decline of 39.91%. Since 2016, Huayi Brothers' stock price has fallen by 41%.

In recent years, Huayi Brothers has vigorously promoted live entertainment, namely the film and television town, but it has also achieved little success. Huayi Brothers did not disclose in its annual report how much money was invested in the film and television town, but from the company's executives' public statement that they spent over 100 million yuan to build the Suzhou River in the Suzhou theme park, it can be inferred that the investment in the film and television town is huge.

In the industry, the most successful model of film and television content + theme park is Disney. Disneyland has decades of classic IP as its foundation and development, while Huayi Brothers Suzhou Film World, which will open in July next year, adopts elements of four movies, including "If You Are the One", "Assembly", "Detective Dee" and "Tai Chi", and the themes are not very replicable.

If real-life entertainment fails, the depreciation and other expenses brought about by the heavy asset model will further erode Huayi Brothers' profits.

As the year draws to a close, the box office of one of Huayi Brothers' two major dramas this year, I Am Not Madame Bovary, is likely to be fixed at 390 million yuan. The other major drama, The Last Romance, is about to face off against Legendary Pictures' The Great Wall. It is foreseeable that Huayi Brothers will once again suffer from a lack of channels.

For Huayi Brothers, a company that has been established for more than 20 years, long-term directional choices may be more important than short-term financial benefits.

Huayi Brothers' shares will resume trading on December 7. During the two and a half months of its suspension, the ChiNext Index fell slightly by 2.13% and the Shenwan Media Index fell slightly by 0.39%.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.