Bottom line: A new equity alliance between Qihoo and Norway’s Opera web browser is a smart move that could see initial turbulence due to differing management styles, but should ultimately benefit both sides.
Security software specialist Qihoo 360 (NYSE: QIHU) is taking an important step towards its ambitions of becoming a global Internet brand, with word that it’s part of a group set to buy Norway-based Opera (Oslo: OPERA), maker of the world’s fourth most popular mobile Internet browser. Qihoo is already the maker of one of China’s most popular homegrown web browsers, and is also posing one of the first serious challenges in years to online search leader Baidu (Nasdaq: BIDU) with its Haosou.com engine. It’s also making a big push to move its highly popular security software products into the global marketplace.
Against that backdrop, this new deal looks quite intriguing and also like a smart step for Qihoo to complement its current strengths. But I would also caution that Qihoo is famous for its business tactics, which many might describe as highly aggressive and even unethical. Those include designing products that make big changes to computer and smartphone configurations without their users’ knowledge, most often to favor Qihoo at the expense of rival products.
We’ll return to that kind of broader implications of this deal shortly, but first let’s look at the actual sale that will see a Chinese group purchase Opera’s shares for 71 kroner ($8.52) each, representing a hefty 46 premium to their last closing price. (English article; Chinese article) The deal values Opera at 10.5 billion kroner, or about $1.2 billion.
Besides Qihoo, other members of the buying group include game maker Beijing Kunlun Tech, as well as financial investors Golden Brick Capital Management and Yonglian Investment Co. There’s no breakdown on how much each of the partners will invest, but an equally divided participation would put the figure at about $300 million from each.
Qihoo might have wanted to make this investment with less partners, as it’s clearly the biggest beneficiary from a product perspective. But Qihoo’s finances are a bit stretched right now, as it attempts to conduct a $9.3 billion privatization of its New York-listed American Depositary Shares (ADSs). Qihoo is also pouring big money into its year-old smartphone division, which was also the source of costly battle for control last year with joint venture partner Coolpad (HKEx: 2369).
World’s Fourth Largest
Opera is the world’s fourth most popular mobile browser with about 7.3 percent of the market, behind Google’s (Nasdaq: GOOG) Chrome (42 percent), Apple’s (Nasdaq: AAPL) Safari (34 percent) and the Android browser (11.1 percent). Smartphone makers that currently install the browser on some of their products include global giant Samsung (Seoul: 005930), as well as homegrown Chinese giant Xiaomi.
There’s no mention of any speeches by Qihoo’s controversial CEO Zhou Hongyi or any other Chinese executives at a news conference to discuss the deal. Instead, the reports include discussion by Opera executives, who explained they made their decision because all of their current rivals are part of broader ecosystems of products and services.
Thus Opera seems to be putting its fate into the hands of China’s burgeoning online ecosystems, which are dominated by companies like Qihoo as well as the “Big 3” of e-commerce giant Alibaba (NYSE: BABA), social networking leader Tencent (HKEx: 700) and Baidu. Among those 4 companies, Tencent would probably be my preferred partner, while Qihoo might be a distant second.
That’s because, as I’ve already said, Qihoo is known for aggressive business practices that could quickly lead to conflicts with its new Norwegian partners who are western and undoubtedly far more conservative. That said, I do like Qihoo for its forward-looking nature in terms of new products and services, and also a strong ability to execute its vision. At the end of the day, we can probably expect to see some clashes early in this partnership due to differing styles. But I also expect they will eventually establish a solid working relationship that could ultimately benefit both partners.
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