Baidu Buys Into Literarture, Sohu To SNS

Baidu reportedly near deal to buy Zongheng literature site

Internet stalwarts Baidu (Nasdaq: BIDU) and Sohu (Nasdaq: SOHU) are back in the M&A headlines with news of relatively small acquisitions, indicating the market may be running out of big targets as we prepare to end a landmark year for major deals in China. I’ve been reporting on Chinese Internet companies for more than a decade, and during most of that time would be lucky to see 1 or 2 major acquisitions or equity tie-ups in any single year. But all that changed this year, with top Internet names like Baidu, Alibaba and Tencent (HKEx: 700) emerging as major buyers in a series of deals collectively valued at billions of dollars.

These latest 2 deals by Baidu and Sohu both look relatively small, based on media reports about the former and an official company announcement by the latter. The first deal has Baidu reportedly near a deal to buy the literature unit of online game operator Perfect World (Nasdaq: PWRD). The second deal has Sohu’s languishing Changyou (Nasdaq: CYOU) online game unit buying control of a social networking software maker, in what looks like a bid to jump-start its business.

Frankly speaking, neither of these deals looks that exciting after the blockbuster year we’ve seen for M&A among Chinese Internet companies. That year saw at least 5 or 6 deals valued in the hundreds of millions of dollars, and one valued at more than $1 billion. Most companies being acquired are money-losers, and also profitable ones that realize they can’t survive over the longer term without a larger partner. On the buyer side, the big Internet firms like Baidu and Alibaba are driving the trend after raising billions of dollars in new bond offerings and stake sales to new investors.

All that said, let’s return to the latest headlines that have Baidu reportedly in late stage talks to buy Perfect World’s, which offers literature, comics and animation online. (English article) No price was given, but it’s worth noting that earlier reports said that Perfect World was previously close to a deal to sell the unit to smartphone maker Xiaomi. I suspect a final deal, if it happens, would carry a relatively modest price tag in the tens of millions of dollars, and is probably being driven by Perfect World’s desire to divest a non-core asset. Baidu would probably like Zongheng to build up its portfolio of self-published content, amid frequent complaints that many of its sites encourage sharing of pirated material.

Meantime, Changyou has announced it is buying 62.5 percent of Raidcall, a maker of social communication software, for $50 million. Investors weren’t too excited about the deal, with Changyou’s shares finishing flat in New York trade after the news came out. Changyou’s shares have been quite volatile this year, rising as high as $40 during the summer but falling since then to their current levels around $28. That looks similar to Sohu, which also rallied earlier in the year over talk about a series of tie-ups for its various businesses. Its shares have lost about a quarter of their value from their peak in early October, and I suspect this new deal is at least partly a feeble attempt to bring some buzz back to both Sohu and Changyou.

More broadly speaking, these 2 deals show that attractive big acquisition targets are starting to become more scare, meaning the number of major deals is likely to slow in 2014. I still think we’ll see a few more big purchases next year, with social networking sites (SNS) Renren (NYSE: RENN) and Kaixin, and perhaps online clothing seller Vancl as big-name targets. But overall activity won’t be as busy as this year, with perhaps only 2 or 3 deals likely over the $200 million mark.

Bottom line: Two small acquisitions by Baidu and Sohu indicate the market for big deals is starting to slow as attractive major targets become more scarce.

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