The market is abuzz with rumors that China’s leading online brand and Internet portal Sohu.com Inc. (SOHU) could be acquired by the premier online search giant in China, Baidu.com (BIDU). Baidu also happens to be Sohu’s prime competitor.
Sohu’s shares have so far reacted to various takeover rumors and soared 15% over the last month. The company has refrained from making any comment on this.
However, according to Silicon Valley’s Tech Trader, the company’s CEO Charles Zhang commented that Sohu’s current stock price is too low, which limits it from being a potential take-over candidate. Zhang also pointed out that even if the price rises the company has no intention of selling out itself in the near future as its long-term prospects are bright.
In August, Sohu spun off a part of its proprietary search engine, Sogou (which means ‘Search Dog’ in Chinese). Sogou is China’s third largest search engine. The net proceeds from the sale will be used for further development of its business, the company pointed out.
Sohu signed a preliminary, non-binding term sheet for the sale to strategic investors, including Alibaba Group Holding Ltd. and Yunfeng Fund for a minority interest of 16% in its Sogou online search business. Yunfeng is controlled by Alibaba CEO Jack Ma and Target Media founder Feng Yu. Terms of the deal were not disclosed.
Sohu’s Zhang would also invest in Sogou. Zhang’s investment group would be entitled for a stake of 16% in Sogou. Sohu would have the remaining 68% stake.
Alibaba’s investment will aid the development of Sohu’s search engine which has a meager market share, Sohu’s CEO commented, according to the research firm iSuppli, that Sogou’s market share was just 0.8% last quarter ended June, compared with Baidu Inc.’s 70.8% and Google Inc.’s (GOOG) 27.3%. Management also pointed out that the Sogou search engine will drive the company’s profitability going forward. Further, the company plans to hold a 20.0% share of the China search market over the next three years.
Search media is a significant contributor to Sohu’s growth. The search traffic growth will eventually generate increased search advertising revenues in 2010. Sohu’s popular search engine — the Sogou Pinyin — continues to gain popularity and market share through increased product quality and effective marketing campaigns.
With an increase in average daily users, Sogou Pinyin has been installed in roughly 70% or over 100 million personal computers (PCs) in China, adding to Sohu’s growth. Sohu released a web browser toward the end of 2008 and also launched the mobile version of Sogou Pinyin in 2009.
To compete against Sina Corp. (SINA), the leader in blog applications with ‘Star Blog,’ Sohu launched the Sohu Blog Voice/Vision Expression Version, attempting to reach a wider customer base. Thus, the company has maintained its second position in China’s web portals with a user base of 250 million.
Moreover, increased advertising spending, including display and search in China, is will likely generate further growth. Sohu expects to regain momentum in 2010 and beyond amid economic recovery in its portal business.
To sell its games in the U.S. market and increase focus on the MMORPG business, Sohu spun off its online game division, Changyou.com in April 2009. Changyou is a leading online game developer and operator of China. Sohu raised approximately $128.3 million from the spin-off by issuing 8.6 million ADS at $16 per share. Currently, Sohu holds approximately 66% of the total outstanding equity interest in Changyou and controls approximately 80.8% of the total voting power.
The spin-off is expected to increase user base and thereby help gain shares in the MMORPG market (which is currently 20.0%). According to China Internet Network Information Center (CNNIC), Analysys and IDC, 82% players prefer MMORPG game in China. MMORPG has grown at a rapid pace and revenues have witnessed a CAGR of 100% over the last five years.
According to the studies by CNNIC, China’s Internet users reached 384 million by the end of 2009, more than the total population of the United States. This represents a tremendous growth opportunity for Sohu, given its penetration into the gaming, news, content search and other online services.
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