Orange Hotel’s Wu Hai: Is Capital the Company’s True Owner?

This may not be a success story about working with capital, but it is a very real one. ---- Is capital the company’s true owner? After selling the company, Orange Hotel founder and CEO Wu Hai wrote an emotional article. He sincerely thanked the investors who had supported him over the years, but also said his role in Orange Hotel’s development had been that of a surrogate mother: capital was the child’s true owner. He said: “We devoted almost our entire lives and all our youth to carrying and raising a child. But when the final strategic investor, Huazhu Hotels Group, took Orange over from the investors, I realized that they might be the child’s real mother. After raising the child for so many years, I had developed the illusion that it was mine. In fact, I was only a surrogate mother.” ---- Rapid expansion with capital Orange Hotel did not enter its rapid-expansion phase until the Carlyle Group came in. When the two sides signed their agreement in 2012, Orange had only 25 hotels. After Carlyle’s arrival and before Huazhu’s acquisition, it had more than 200. During the expansion, however, they discovered the disadvantage of being unfamiliar with local markets. They did not know the best local properties and ultimately had to use franchising arrangements, relying instead on partners with distinctive local resources. Once Orange stopped insisting on directly operated hotels and worked to control costs, its hotel count surged. By then, however, Wu Hai was no longer the real boss of Orange Hotel. His original commitments had, by this point, gradually changed. ---- The investors’ exit Once capital invests in you, the day eventually comes when it asks you to arrange an exit. In late 2016, Carlyle China’s Yang Xiangdong discussed exiting Orange Hotel with Wu Hai. Contrary to what you might imagine, this was not a story of greedy capital insisting on selling a company for a quick profit without regard for its founder. Even Wu said he knew Carlyle would not force him to sell if he firmly opposed the idea. At the time, however, Carlyle’s fund had only three years left in its life. The money Carlyle had raised would soon reach the end of that term, and it would have to return proceeds to its own investors. Preparing for a domestic listing would take a year, followed by a highly uncertain wait for approval. To some extent, Carlyle had difficulties of its own. Among the potential investors, the highest offer ultimately came from Huazhu Group, led by Ji Qi, who also came from Ctrip. Wu Hai said: “I know my professional responsibilities. I should respect the investors’ wishes. Without them, this child would never have existed. I agreed. I would fulfill my duty as a surrogate mother.” The deal was formally completed in February 2017. Huazhu acquired Orange Hotel outright for RMB3.65 billion, officially ending Wu’s ten-year entrepreneurial journey. --- Wu Hai as a person This is a thoroughly real business story. An entrepreneur passionate about starting a business created a product he cared about and earned a reputation and customers. Then, buffeted by market forces, he gradually had to give up his original commitments, embrace capital, and ultimately hand over his creation. Let’s talk about Wu himself. Selling his company may not have brought the glamour enjoyed by CEOs who take their companies public. But many in the industry consider him a very courageous, deeply loyal, and sensitive boss. There was also Wu’s performance-based agreement with Carlyle. Negotiations were nearing their end, but with hotel companies out of favor in the capital markets, the two sides remained far apart on valuation. Wu insisted on not lowering it, because doing so would reduce the value of shares held by earlier investors and the core colleagues on his team. Wu, known for his loyalty, made a decision: he pledged all his options to Carlyle as collateral. If the business performed poorly, he would transfer all those options to Carlyle; if it performed well, he would get them back. His willingness to protect the interests of the investors and colleagues who had supported him showed his loyalty. That is Wu Hai, an utterly real entrepreneur with both convictions and weaknesses. All three of his ventures ultimately ended with him selling the company. He may not be China’s greatest entrepreneur, but he is someone worth learning from. ---- #得到 (Dedao) #張瀟雨商業經典案例課 (Zhang Xiaoyu’s Classic Business Case Course)