Chapter 3: Kunpeng & Huawei Merger (Part 1)

Chapter 3: The Kunpeng–Huawei Merger (Part 1)

In the period that followed, the merger between Kunpeng and Huawei hit a deadlock. Neither Fanhai, Kunpeng's investor, nor Qinghui, Huawei's investor, was willing to concede on the critical issue of which side would provide the CEO.

Zhao Hanqing flew to Shanghai several times—Kunpeng was based in Beijing, Huawei in Shenzhen, and as a show of good faith, both sides had agreed to hold negotiations on neutral ground. For the sake of confidentiality, they didn't use any institutional meeting rooms or hotel facilities, but instead rented a small private home.

During a regular meeting one day, Jing Hong once again asked Zhao Hanqing about the progress of the merger.

"It's tough going," Zhao Hanqing said honestly. "The talks have reached an impasse."

After a moment's thought, Zhao Hanqing put forward a new angle: "What about co-CEOs? After the merger, the original CEO of Kunpeng and the original CEO of Huawei would be at the same level, both as CEOs, each responsible for certain business segments—a balanced arrangement where neither side dominates the other."

Jing Hong shot it down immediately. "No. I don't see that working."

"Or..." Zhao Hanqing said thoughtfully, "we could propose the 'co-CEO' plan first, and once Qinghui accepts, then clarify that while it's 'co-CEO' on paper, the CFO and other core executives would report to Kunpeng's CEO. That way, it's called 'co-CEO' in name, but Kunpeng's CEO wields the actual power, which can be handed over later."

"Don't bother," Jing Hong said, leaning back in his chair. "Zhou Chang won't agree."

There are two types of negotiation strategies. One is called "waterboarding"—repeating the same point over and over until the other side drowns in it. The other is getting the other side to give ground inch by inch—every time a deal looks like it's about to close, you throw in new demands, and while each concession is small, they add up.

"Your plan requires the other side to concede multiple times," Jing Hong said, thinking of that vulture-like look in Zhou Chang's eyes. He wouldn't even bother trying. "Zhou Chang? Impossible."

Zhao Hanqing weighed his words: "Then—"

"If the merger falls through, it falls through," Jing Hong said. "The company's not short on cash anyway."

Zhao Hanqing nodded. "Alright. At this stage, that's all we can do."

"Wait." As they were about to leave, Jing Hong suddenly asked Zhao Hanqing, "You mentioned earlier that Huawei's current CEO doesn't seem to fully trust Qinghui?"

"Yes, there's a bit of that feeling," Zhao Hanqing said. "Though it's not tense—it's more of a personality thing. The CEO is a woman, but you can tell she's very strong-willed."

Jing Hong dropped his gaze, drummed his fingers on the desk, then looked up and held the other man's eyes. "Alright, let's give it another shot. First, notify Mr. Shen at Goldman Sachs that Fanhai and Qinghui can't reach a consensus on the critical issue of who becomes CEO of the new company, and Fanhai doesn't want to waste any more time. If the CEO issue can't be resolved, Fanhai won't continue participating in further merger negotiations."

Knowing Jing Hong wasn't finished, Zhao Hanqing listened quietly.

"Then," Jing Hong continued, "tell Kunpeng to immediately prepare the next round of financing BP (business plan), and tell all the VCs that come inquiring that Kunpeng's next round will still be led by Fanhai, with everyone else just following. In the meantime—" Jing Hong paused, "sound out a few VC/PE firms about Huawei's financing plans, and give Huawei's CEO a heads-up: if Huawei's next round is still led by Qinghui, she'll lose control of her company. Of course, I'm sure she already knows that, but it's worth reminding."

Zhao Hanqing thought back: "That's right. After two rounds of leading investments, Qinghui has already taken 40% of Huawei's shares. The current equity structure is: the founder, who is also the CEO, holds 55%, Qinghui holds 40%, and another VC holds 5%—"

"Right," Jing Hong finished the thought for him, "so if the next round is still led by Qinghui, Qinghui Group's share count will exceed the founder's, making them Huawei's largest shareholder, and the original founder loses control of the company."

Jing Hong did the math quickly. Qinghui Group took a portion of shares each round, and after two rounds, they had 40%. Suppose in the next round, Huawei again offered 25% of company shares for financing, with Qinghui as the lead investor taking 20% of that—then after the next round, Qinghui Group's share count would reach 50%, while the founder's shares would be diluted to 41.25%. Qinghui would surpass the founder.

The exact numbers might differ, but the gist was about right.

Zhao Hanqing got it, but he still wanted to confirm Jing Hong's intent. He nodded: "Right. Let's calculate. After this failed merger, both Kunpeng and Huawei should have limited funds on their books, so they'll need to start the next financing round. So we can... use the fact that 'Huawei's current CEO doesn't fully trust Qinghui' to get Huawei to refuse Qinghui's lead investment again."

For Huawei's founder, having Qinghui's share count exceed her own would be dangerous.

"Right." Knowing Zhao Hanqing was on board, Jing Hong still wanted to be specific—he didn't want to leave anything to chance. "This way, Zhou Chang will discover that on one hand, our Fanhai will continue to lead Kunpeng's investments and increase our stake, while on the other hand, because of the CEO's distrust, Qinghui can no longer lead Huawei's investments. With each passing round, Qinghui Group's share count will only keep getting diluted. After that, Huawei keeps burning through more and more money, but in this economic climate, aside from Fanhai and Qinghui which have parent company backing, there aren't many VC/PEs willing to open their wallets for something with no clear path to profitability and a massive burn rate. There will come a day when Huawei can't raise another dime, and when that day comes, Qinghui won't get terms this good again. Right now, everything's on the table except the CEO seat, but in the future? Ha."

Fanhai and Qinghui were strategic investors in it for the long haul, while VC/PEs were financial investors seeking short-term returns—they were different.

Currently, Fanhai held 40% of Kunpeng's shares, Qinghui held 40% of Huawei's, and the two companies had roughly comparable valuations. So in the Kunpeng-Huawei merger case, Fanhai and Qinghui effectively had almost equal leverage. But after the next financing round, Fanhai's stake in Kunpeng would rise while Qinghui's stake in Huawei would fall—they wouldn't be on equal footing at the negotiating table anymore.

Honestly, the people involved weren't the real threat—this merger was primarily a battle between Fanhai and Qinghui, same as always.

"So," Zhao Hanqing added, "Zhou Chang will probably want to push the merger through before Kunpeng and Huawei finish their next rounds."

Jing Hong nodded.

"But," Zhao Hanqing asked, "in the next round, will Kunpeng... actually let Fanhai lead again? Will they really let Fanhai become the largest shareholder?"

Jing Hong's eyes flicked up: "Let's cross that bridge when we get to it."

Zhao Hanqing understood.

Meaning, on Kunpeng's side, they might not necessarily let Fanhai take control either...

"Let's try to bluff Zhou Chang first," Jing Hong said. "Kunpeng's CEO can play along and leak a fake story that 'Fanhai is leading the next round.' That's easy enough. He can say that a scattered shareholder base is a big problem, and Fanhai has always been a good partner—they handled the insurance, got the licenses, and after weighing everything, they chose to trust Fanhai Group. He should play dumb a little—he's a tech nerd anyway. Even if Zhou Chang's suspicious, he can't be sure, and I don't think he'll risk it."

Zhao Hanqing nodded: "Understood. We'll wait and see whether Zhou Chang, after being turned down for the next round of lead investment by Huawei, will resume negotiations soon, hand us the CEO seat, and close the merger before the financing round to negotiate better terms elsewhere."

Jing Hong chuckled softly: "Right."

...

And so, the merger was put on ice.

The merger talks fell apart, and Kunpeng and Huawei continued to compete, bleeding cash.

Then, after some time, Kunpeng was the first to leak word of its next round. A few big VC/PE firms came sniffing around, and before long, the whole industry knew: the next round would still be led by Fanhai.

Kunpeng's CEO kept stressing that he trusted Fanhai, trusted Mr. Jing and Mr. Zhao, and said that Mr. Jing and Mr. Zhao respected Kunpeng, never meddled in operations, always saw Kunpeng's founding team as the company's biggest asset. Over the four years since Kunpeng's founding, the two sides had always been in it together with a great working relationship. Therefore, rather than having shares scattered among a bunch of unknown institutions, held by some faceless investment firms, he'd rather have Fanhai at the wheel. Moreover, it was obvious that too many stakeholders would slow down decision-making—a single shareholder makes decision-making easier. He ran the numbers for the various institutions: if they turned down Fanhai as the lead investor, then after two more rounds, the investment firms' combined stake would roughly match his plus Fanhai's, and if they joined forces, things would get even messier. And as everyone knows, "institutional investors" chase short-term returns while Fanhai plays the long game.

Around the same time, word came from Huawei's side that they were also raising a round, had already turned down Qinghui Group's offer to lead again, and were looking for new VC/PE backers. Currently, they were in deep talks with two or three state-owned PE firms.

Clearly, Huawei's CEO didn't want Qinghui taking over her company.

Under Company Law, listed companies must have one share, one vote, and if Huawei ever wants to go public, this control issue will blow up.

Everything was going according to plan.

Jing Hong waited for Zhou Chang to come to him.

Putting himself in Zhou Chang's position, Jing Hong still figured that even if Zhou Chang suspected the whole thing was a trap, he wouldn't roll the dice. Guys like Zhou Chang like to gamble, but they like being in control even more—they only "gamble" when they're backed into a corner.

It's just one CEO seat... As Jing Hong saw it, Qinghui, having been turned down as lead investor, had no real choice but to give up the CEO seat and push the merger through. Otherwise, Qinghui would just watch its stake get diluted round after round.

But Zhou Chang was playing it cool.

By the time Kunpeng and Huawei's Series C rounds had caught the industry's attention, Zhou Chang still hadn't budged.

Even Jing Hong was a little puzzled.

...

While the merger was at a standstill, something else involving Qinghui Group grabbed the public's attention first.

Zhou Chang sent a letter to the SEC (U.S. Securities and Exchange Commission) and to Yueguan Corporation, terminating the acquisition agreement.

It caused a stir, but Jing Hong wasn't the least bit surprised.

A few months back, Yueguan's boss had once again called Zhou Chang an idiot. But Zhou Chang, despite being called that, did something completely out of character—he offered to buy Yueguan outright, with a pretty tempting price, basically handing Yueguan's boss a fortune. At the time, Jing Hong had a feeling Zhou Chang was up to no good.

Zhou Chang killed the acquisition deal and played Yueguan. Yueguan's boss was hopping mad—that night, he posted twelve long rants on his own social media, trashing Zhou Chang.

Zhou Chang, for his part, casually fired back: "Qinghui found major operational problems during due diligence, so terminating the acquisition was completely justified."

At that time, Qinghui's acquisition offer was a conditional one, subject to the results of further due diligence.

In short, "Qinghui discovered major operational issues during due diligence," causing Yueguan's stock price on the NYSE to fall for two consecutive days, shedding 19%.

By the third day, because Qinghui's due diligence on Yueguan had uncovered problems and issues, the SEC announced an investigation into Yueguan, and its stock tanked once again. Within five days, it had fallen a total of 38.44%.

Jing Hong had a pretty good idea of what was going on.

Zhou Chang simply wanted to take down Yueguan.

Claiming to acquire, but in reality, he used due diligence to survey Yueguan's condition and broadcast the problems to the world. Jing Hong suspected that Zhou Chang had known something all along, and that "due diligence" was just an excuse.

This was not unrealistic. Yueguan's people might not have been so good at keeping their mouths shut.

The SEC's announcement stated that it would conduct a series of reviews into Yueguan's "data compliance." Jing Hong did a little speculating and figured that Yueguan's methods of obtaining user data likely didn't comply with Chinese regulations, and since this data was directly tied to revenue and other key figures, Yueguan might have also failed to fulfill its CIIO compliance obligations.

Actually, it could've been worse, Jing Hong thought. If they'd been caught with phony ad contracts or something, Yueguan might have been delisted. Some companies pull that trick—making it look like tons of companies advertise with them when it's all fake.

Of course, at the Jing family dinner table, Jing Haiping brought up Zhou Chang again.

"He's playing them!" Jing Haiping strongly disapproved of Zhou Chang's approach. "He strung them along for months, and in the end, they didn't sell, and their stock tanked nearly 40%!"

Jing Hong's cousin, who happened to be visiting—his uncle's daughter—widened her eyes and asked, "So this is a legit 'The weather's turned cold, let the Wang Corporation go bankrupt' moment?"

Jiang Mei asked, "What does 'The weather's turned cold, let the Wang Corporation go bankrupt' mean?"

The cousin immediately explained, "It's how domineering CEOs are described in books. There's this famous novel on Jinjiang that opens with 'The weather's turned cold—let the Wang Corporation go bankrupt,' and later people used that phrase to describe domineering CEOs in stories!" After a pause, as if she'd just struck gold, she added, "Oh my god, Yueguan's CEO's surname is Wang too!"

Jing Hong chuckled. "Yueguan going bankrupt? That's not gonna happen."

But they were definitely in a world of embarrassment.

Still, Jing Hong couldn't help but want to tell Yueguan's CEO: With your two-bit skills, why provoke Zhou Chang? Constantly insulting him, sticking to him like gum on the bottom of your shoe—it'd be weird if he didn't take you down.

Anyone who made Zhou Chang unhappy could be sure he'd make them ten times more miserable.

Across the table, the cousin added, "Now Yueguan's own social media is buzzing about this, and the boss is furious. Just now, an interview with Zhou Chang even hit number one on the trending list."

"Oh?" Jing Hong didn't follow such things, responding casually, "What interview?"

The cousin pulled out her phone, unlocked it, glanced at it, and chuckled. "This one, I remember now. A reporter asked what he thought about Yueguan's market value evaporating nearly 40%. Zhou Chang said, 'The 70-plus million intellectually disabled kids worldwide who face discrimination, and the over 5 million in China, will all be very happy.'"

Jing Hong: "………………"

He thought: What the hell kind of person is this?

Author's note:

The first half should be pretty easy to follow? Jing Hong planted a false rumor, saying Fanhai could continue investing in Kunpeng and keep taking equity, but Qinghui couldn't continue investing in Huawei because Huawei's boss disagreed. That way, when merger talks resumed, Fanhai and Qinghui would hold different stakes in the merged entity, so their say in things would be different. So Jing Hong figured Zhou Chang would want to fast-track the merger.

[Notes]:

①Due Diligence (DD): A comprehensive investigation conducted by an investor into a target company's financials, operations, and other aspects after reaching a preliminary cooperation intention.

②CIIO: Refers to operators of Critical Information Infrastructure. CIIOs have a series of compliance obligations.

Also, the story's opening is set in 2017. After 2019, Shanghai and Shenzhen's STAR Market began allowing tech companies to have dual-class share structures, but the main boards still require one share, one vote (each share carries one and only one vote).

"The weather's turned cold, let the Wang Corporation go bankrupt"—does this need explaining? It's from a danmei novel posted on Jinjiang Forum's "Xianqing" section in 2005, opening with "The weather's turned cold—let the Wang Corporation go bankrupt." The phrase went viral and became shorthand for domineering CEOs. Readers today might not know, but over a decade ago, Jinjiang Forum was actually a place where people read stories, with distinctions like "Green Jinjiang" and "Pink Jinjiang." The forum rarely hosts stories now, but the phrase has endured...