If you can’t build it yourself, then go out and buy it. That looks like the message coming from leading search engine Baidu (Nasdaq: BIDU), which has just raised a tidy $1.5 billion in its first-ever bond offering that could be used in part for acquisitions as the company looks to diversify. Baidu surprised many, myself included, with this massive new bond offering, which comes as growth for its core search business shows signs of slowing sharply.
Still, Baidu is hardly in need of cash, reporting just last month that it currently has nearly $3.4 billion in cash on hand after years of making big bucks as the dominant player in China’s lucrative online search market. So, what’s behind this new cash raising effort? I suspect that aggressive investment bankers were at least partly behind the deal, convincing Baidu it could raise the money cheaply in the current market where interest rates are low.
Perhaps equally important, Baidu may want to signal to the world that it’s looking for acquisitions in a bid to diversify beyond its core China search business. That’s an important message to send, since Baidu really needs to find some new growth engines as its current business slows. What’s more, the company has a very poor record at building its own new businesses organically, which was most recently on display with the shuttering of its highly hyped e-commerce initiative with Japan’s Rakuten (Osaka: 4755) earlier this year. (previous post) Baidu hasn’t had much better luck with organic expansion overseas either, with its Japanese search business largely a flop despite years of investment.
Let’s have a quick look at this new bond offering, which comes amid a flurry of similar debt sales by some of China’s bigger net firms. The offering is divided 50-50 between 5- and 10-year notes, carrying interest rates of 2.25 percent and 3.5 percent, respectively, which looks quite attractive for Baidu. (company announcement) Baidu doesn’t say much about what it will do with the money, although comments in the Chinese media imply that M&A is a strong possibility, especially overseas.
If the offering was meant to create investor excitement, it certainly didn’t have much effect on Wall Street, where Baidu’s shares dropped sharply after the announcement but then rebounded to close down 0.8 percent. The sell-off continued a broader trend for Baidu shares, which were once an investor darling but have slid 30 percent since mid-August on concerns about new competition and a broader slowdown in its core search business which relies on heavily on advertising revenue.
From my perspective, acquisitions may be the best approach to diversification for Baidu, since its record of building new businesses by itself is quite poor. One of its few success stories was its purchase last year of a stake in online travel site Qunar, which is now looking to make a New York IPO in the US.
Investors will be watching closely to see what Baidu does after raising these funds, and we can probably expect to see 1 or 2 acquisitions in the $100-$300 million range in the next year. Whether those purchases will succeed remains to be seen, but they will almost certainly be more exciting than Baidu’s own disappointing initiatives over the last few years.
Bottom line: Baidu is likely to make 1 or 2 major acquisitions in the $100-$300 million range over the next year, following a $1.5 billion bond offering.
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