Investigations into Internet company Netease could create uncertainties about a proposed merger deal with the Hong-Kong based I-Cable Communications Ltd.

The announcement that two senior executives of Netease have resigned, followed by yesterday's NASDAQ announcement that it was extending its investigations into advertising revenue, has provoked the concern.

Netease, one of the three biggest Internet portals on the Chinese mainland, said yesterday it had expanded its internal investigations into incorrect reporting of revenue in the fiscal year ending on December 31, 2000 and in the first quarter of this year.

The company also announced that King Lai and Susan Chen, its chief executive and chief operating officer, resigned "to pursue other opportunities." Their posts will be temporarily replaced by Netease founder William Ding.

"This transition certainly presents challenges," Ding said.

"I am confident that these changes will have a minimal impact on Netease.com's business continuity," he added.

A Netease executive said no other employees were leaving, and that Anderssen Consulting has been busy with the investigations since the revelations in May. The company's financial report would be delayed until the end of the investigation.

The company's drastic changes could delay its acquisition talks with I-Cable and may put itself in a disadvantaged position to sell itself.

"The resignation of calibre like the CEO of a company will be quite damaging to a company which is in merger and acquisition talks," said Fang Xingdong, a senior Internet analyst.

Last week, it was reported that Netease and I-Cable were about to reach an agreement on the acquisition of the mainland portal and I-Cable confirmed it was talking to Netease in a statement issued on Sunday.

The management upheaval was generally believed to be related to the misrepresentation of revenue and the poor performance of Netease in marketing and stock prices.

It has been suggested that about US$3 million of the revenue in the 2000 fiscal year and US$1 million in the first quarter of this year may have been involved.

Despite reports that I-Cable had said the resignations would prevent the companies from talking further, discovering the truth is a priority for the cable TV operator.

Other rumours suggested William Ding, who holds about 58 per cent of the shares of Netease, had agreed to sell his company for US$85 million. This would not sit well with minority shareholders, whose permission is a prerequisite for such a move. The resignations and investigation are certain to increase the uncertainty of their decisions.

However, some Chinese analysts still believe that in spite of the possible delay of an acquisition deal between Netease and any other potential buyers, the company is still a good target.

Lu Weigang, an IT columnist with China Infoworld, pointed out that with the establishment of yesterday's new joint venture by America Online (AOL) with China's biggest computer maker - Legend Holding Co's Hong Kong subsidiary - other Internet giants are also seeking profit from the world's largest potential Internet market.

"AOL's competitors, like Yahoo! and Lycos, will be more anxious to gain a foothold in the Chinese market after AOL's partnership with Legend," Lu said.

It was revealed that some international Internet businesses have been active recently in consulting Chinese experts about strategies to cope with AOL's entry, although they are only allowed to provide technical support and consultation in China.

Netease has more than 17 million registered users, 100 million daily site hits and almost 740,000 web page users.

Hong Kong companies could take advantage of its influences in South China, where it was founded.

The company's advantages in Internet-based technology against most Chinese dotcoms could also expand the revenue sources of the company.

According to Netease's most recent financial report in the fourth quarter, the company still had a net cash balance of about US$85.6 million.

Following Netease's announcements yesterday, its stocks suffered from a sharp 9 per cent fall on the NASDAQ market to end at US$2.04, compared with the 16 per cent rise after the chairman of its major competitor -Sina.com - said his company would be more active in seeking partners last week.