The Son Also Surprises

There are a lot of Lis in Hong Kong, but only one Li Ka-shing. If you live in the territory, you might be able to avoid hearing or reading about him–if you’re wearing earplugs and a blindfold–but you could hardly avoid enriching the 71-year-old tycoon. Li is a major player in the local real estate market, in retail, telecommunications and power generation, and his port operation handles 30% of Hong Kong’s trade. His nickname in the press is Superman. It isn’t a very witty moniker–and it isn’t meant to be in a city that takes moneymaking very seriously.Now, from the same family, comes Superboy: Li’s 33-year-old son Richard. Last week, Richard succeeded in taking over Cable & Wireless HKT, the territory’s telecom giant, using an Internet company he established only 10 months ago, Pacific Century CyberWorks. The deal, valued at $38 billion, was Asia’s biggest takeover ever. At current market valuations, Richard’s spanking new empire is starting to rival the one Dad took decades to amass. And while CyberWorks’ capitalization could deflate tomorrow with a market slump, Richard’s vision is undeniably immense. He wants to provide fast and flexible interactive television and Internet access, through so-called broadband connections, to the vast populations of China, India and the rest of Asia–and thus to become the largest such provider in the world.
If Richard’s fortunes have been pumped up by the Internet, the father also rises. Two weeks ago, Li Sr. went public with a tiny, barely operating Internet company called Tom.com, setting off investor hysteria in the streets of Hong Kong. Li says Tom.com will become the biggest portal, or entry site, for Chinese speakers using the Internet–a grand goal, too.

Li & Li have clearly seen the future in the so-called New Economy and are staking out big claims. The intriguing question about Superman and Superboy: Are they working as a superhero team or as future competitors? Much is made in the local press of Richard’s attempts to step out of his father’s shadow, of how he was passed over in favor of older brother Victor, now 35, as heir apparent to the Li empire, and of the differing styles of father and son. Ka-shing is reclusive, cordial, traditional and lives in the same house he bought for $13,000 in the 1960s; Richard likes junk food, can be blunt with subordinates, is building a lavish mansion and flew Whitney Houston to Hong Kong for his millennium party. One trait the pair share is a penchant for being seen with beautiful women; both are currently bachelors: Ka-shing is a widower and Richard has never married. When asked by Time which figure in the world of business he admires most, Richard mentions not Dad but Sony’s co-founder Akio Morita–and he makes thunderously clear that questions about his father and their relationship will not be entertained.

Yet Richard is currently deputy chairman of Li Ka-shing’s Hutchison Whampoa, owns 5% of Tom.com and has a long history of cross dealings with his old man. Is he a son with burning ambitions of his own? Or one standing comfortably on his father’s shoulders? Perhaps a little of both. Their relationship is just very, very complicated, says Simon Murray, former managing director of Hutchison and a family friend. Trying to puzzle out the Lis is a bit like the visual perception test in which you can see an image of two faces staring at each other–or, with a shift in focus, see a vase.

Concentrate on this particular vase, as many do in Hong Kong, and you’ll find it is huge. If you put together all the companies controlled by father and son, including Cable & Wireless HKT, they account for more than a quarter of the capitalization of the Hong Kong stock market. In the telecom business alone, Li-controlled companies now have 60% of Hong Kong’s mobile phone market and virtually the entire fixed-line system. Bricks and mortar? Li is Hong Kong’s property king. And now he and son have displayed highly advanced knowledge of how to prosper in the new era of telecoms and the Internet, and of the strange ways in which takeover financing has evolved. Richard, for one, sees these talents as anything but local. These are truly global transactions, he tells Time. The message: watch out world, Hong Kong isn’t big enough for the Li family anymore.

Li Ka-shing’s life is one of the most remarkable success stories of postwar Hong Kong. Born in the southern Chinese city of Shantou in 1928, he fled to Hong Kong in 1940 but quit school at age 15 to make a living selling plastic wallets. In 1950 he started a factory producing plastic flowers for export. Apartment buildings were his first real-estate purchases. By 1979 the portfolio of his Cheung Kong Holdings–Cheung Kong is Cantonese for Yangtze River–was big enough to impress merchant bankers and, finally, to gain him entrance to Hong Kong’s Very Big Boys Club: he bought from the Hongkong & Shanghai Banking Corp. a controlling stake in Hutchison Whampoa, one of the territory’s traditional hongs, or trading houses. The hongs had long been the center of British wealth and power in the colony.

Long before Britain handed Hong Kong back to China in 1997, business was firmly in the hands of locals, though Li occupied a tier above the rest, particularly in his investments around the world. One of Hutchison’s divisions now manages 18 container terminals from Burma to the Panama Canal; one-tenth of the world’s trade passes through them. An even more spectacular example of the Li touch is in the European telecom business. Last year, he sold Hutchison’s Orange mobile phone unit in Britain to Germany’s Mannesmann group for $5.7 billion in cash and stock worth $8.9 billion at the time of sale. When Britain’s Vodafone AirTouch merged with Mannesmann last month, Li’s share of the new company rocketed in value to around $15 billion.

Li’s sons couldn’t have had a more different upbringing from their father’s. From an early age, Victor and Richard were invited to attend Dad’s board meetings. Their education was extensive, expensive and abroad: both graduated from Stanford University. Richard, in fact, attended schools in California from the age of 13. To supplement a modest allowance sent by Dad, he caddied at a golf course and manned a cash register at McDonald’s. After graduation in 1987, he did time as a fund manager at a Canadian investment bank but was summoned home in 1990 to take charge of Hutchison’s satellite unit. It wasn’t as big a job as Victor’s, who was already being groomed as Dad’s successor, but it would provide Richard his first tilt at the Big Time.

Hutchison had a satellite, which it used for its telecommunications operations. Richard realized that it could also handle television transmissions, and that led to a truly visionary idea. He could circumvent the stodgy government monopolies that controlled TV throughout Asia by beaming programs directly to viewers. True, few Asians owned satellite dishes. But Richard realized that entrepreneurs across the continent could buy a dish and fling cables around the neighborhood to satisfy any household that wanted to see The Bold and the Beautiful or Santa Barbara. He persuaded his father to invest $62.5 million and launched Star TV. (Hutchison’s total investment in Star would climb to $125 million.) As a 20-something boss, Richard didn’t stand on ceremony. On-air glitches prompted famous tirades. Current employees say Richard has mellowed, but he still occasionally berates senior managers in public.

Within two years, Star was bringing modern TV to isolated corners of India and China, attracting 45 million viewers. That success, in turn, attracted suitors. Rupert Murdoch wanted an Asian counterpart to his Fox Network in the U.S. and British Sky Broadcasting, and he invited Richard for a chat on his yacht in the Mediterranean in 1993. A deal was hammered out in a matter of hours. When the final payment came through two years later, Richard had earned Hutchison $950 million.

It’s a measure of Li Ka-shing’s shadow, however, that a billion-dollar-deal wasn’t quite enough for Richard to earn his own, unshared spotlight. Richard followed Star with his own scheme to provide long-distance phone service to Asian businesses via satellite, but that went nowhere. In 1996, brother Victor was kidnapped by Cheung Tze-keung, a local triad boss nicknamed Big Spender, and father Li paid a ransom estimated at more than $100 million. If that wasn’t enough, Hong Kong went into recession after the Asian financial crisis hit in 1997, and Li Ka-shing publicly groused about an excess of democratic fervor in the territory. In terms of business, he said, he would rather do a bit less in Hong Kong. The stock market fell on that late-1998 comment–partly because the fortunes of the Li family, or at least their confidence in Hong Kong, seemed to be slipping.

Then came the rise of dotcoms, which banished such gloom to the trash bin like so many plastic flowers. Richard believed that satellite transmission of the Internet to TV sets in China and India would be his future, and his Pacific Century Group picked up an encouraging $50 million investment from Intel Corp. for that dream in 1998. His next big deal was to develop a high tech Cyberport on a prime piece of land donated by the Hong Kong government–without, strangely, the territory’s usual process of taking bids from potential developers. Critics said Richard was nothing more than an old-style property baron, not a technology visionary. Defenders say the government chose him because the project was his idea and only he had the expertise to make it work.

He then created Pacific Century CyberWorks through a so-called back door listing on the Hong Kong exchange, a procedure in which an existing public company is bought and renamed. (This evades the exchange’s rule that a company must have two years of profits before it can list.) CyberWorks inherited the Cyberport project, and its shares increased 15-fold on its first day of trading.

After America Online used its own pricey shares to acquire Time Warner in January, CyberWorks was in a position to pull off a similar coup. Britain’s Cable & Wireless, which owned 54% of Hongkong Telecom, had made no secret of its intention to spin off non-core businesses like HKT. Talks were on with Singapore Telecommunications, or SingTel, about a merger of the two Asian phone giants. SingTel eventually made an undisclosed offer in cash and stock for Cable & Wireless’ interest. It looked like a deal.

Over Chinese New Year, British investment house Warburg Dillon Read came to CyberWorks with a plan to beat SingTel’s bid, and the idea was put to Richard, who was in London looking for a similar, though smaller, telecom investment. I was saying, ‘Yeah, right,’ Richard recalls. This is so big, so large, it cannot be done. Though his stock price had been climbing, it wouldn’t have been enough to buy a company several times the size of CyberWorks. The skepticism lasted only a couple of days. One thing I overlooked about Hong Kong, he says, was the depth of the financial markets. The money was there if he wanted it.

What Richard also realized was that HKT had assets he could use: its broadband Internet service, which has 100,000 customers; its cellular phone system and the potential of new third-generation cellular technology to enable Internet access; and rights to a valuable deal signed by Murdoch’s Star TV to provide television shows–known these days as content–for HKT’s broadband network. But Cable & Wireless wanted more than inflated CyberWorks stock as payment.

Richard’s team moved fast. In a matter of hours, it raised $1 billion by floating a batch of new shares on the Hong Kong stock market. But billions more were needed, and banks were wary of lending to a fledgling company with little revenue or profit. According to the Asian Wall Street Journal, bankers insisted that any big loan be guaranteed by Li Ka-shing. But they relented when Richard pointed out that HKT had billions in cash–and plenty of assets that could be sold to pay off a loan. He eventually offered HKT shareholders a package of shares and cash that could cost him $12 billion, and he got the required financing.

SingTel’s bid had an albatross around its neck from the start: the company is 79% owned by an investment arm of the Singapore government. It didn’t help that SingTel’s CEO is Lee Hsien Yang, younger son of Senior Minister Lee Kuan Yew. SingTel’s ownership prompted warnings by several Hong Kong legislators that a foreign government would, in effect, control an important local utility. There was widespread speculation that Beijing encouraged Richard to make his bid to keep HKT in local hands. He denies it. In fact, many analysts say the real reason for Richard’s success in clinching the deal was his impressive speed. In a matter of days, he had put together an offer–and the requisite financing–that would have taken other firms months to assemble.

SingTel wasn’t exactly sitting on its hands. Realizing that Li was coming on strong, the company threatened to sue one of his lenders, HSBC, which could have slowed the bidding process and given SingTel time to come up with funding. Unexpectedly, SingTel also got Murdoch to pledge $1 billion to help its bid. The offer came too late; Cable & Wireless accepted Li’s offer early last week.

Murdoch’s participation raises some interesting questions. Was News Corp. vying to create the next big merger of a content-owner with a firm offering broadband delivery systems, similar to the Time Warner-AOL link? And would the SingTel experience sour Richard’s relationship with Murdoch? The former partners are being forced back into business together, since Richard’s HKT still has its content deal with News Corp. Can this marriage be saved?

Perhaps. Richard insists he harbors no bitterness over Murdoch’s last-minute attempt to derail his bid for HKT, though he told Asiaweek that Murdoch has the ability to pull out of the content arrangement. To prevent any such disruption, Richard held peace talks with Murdoch’s son James last week–and even went to Singapore to confront his rival bidders. He reportedly told them he is interested in doing deals with SingTel, and has no hard feelings. That’s not entirely surprising: he will have to sell off parts of HKT to pay down his debt. But it’s also a signal that the young dealmaker is just getting started. Look out, Murdoch. Heads up, Steve Case. Even you’re not safe, Bill Gates.

Has Richard Li emerged completely from his father’s shadow? Perhaps the question is whether he ever can. His virtues in business are often compared to the elder Li’s, as if they were directly inherited or imparted. They both have a record of surrounding themselves with capable people, says Richard Witts, managing director of local brokerage house United Mok Ying Kie and former chairman of the Hong Kong Stock Exchange. And they’re prepared to reward them handsomely. But times have changed. Richard’s game is a confidence game, says Stephen Brown, head of research at Kim Eng Securities, who knows the elder Li personally. At the end of the day, he’s had to sell his ideas, whereas his father sold property. Li knows what it’s like to be making plastic flowers. I think that always stays with you. And I think it’s impossible for the U.S.-educated second generation to feel that.

Even in his hour of triumph, after clinching a $38 billion takeover, Richard finds it hard to get 100% credit. Many analysts point out that all of Hong Kong’s telecom licenses expire in 2006, and the decision on whose gets renewed will surely be made in Beijing. That’s why HKT chose Richard instead of SingTel, the analysts say–because Li Ka-shing’s clout in China will smooth the way. Of course Richard’s takeover is an honor to the Hong Kong Chinese, says Albert Cheng, the city’s most popular radio talk show host. Unfortunately, people will never see him as an entrepreneur because of his father. Recalls Murray, the former Hutchison executive: Growing up, of course, he was quite precocious, insolent, irritating, complicated. But he made me realize that growing up with money isn’t all it’s cracked up to be. In fact, it weighs you down. Sounds like a job for, well, Superboy.

Reported by Isabella Ng and Maureen Tkacik/Hong Kong