IPOs: Sogou Tests IPO Market, But Does Anyone Care?

Bottom line: Sogou is unlikely to make an IPO this year, despite new talk of potential for such a plan from its CEO, and may ultimately never list due to its lackluster performance. 

Sogou floats another IPO plan

Online search engine Sogou is testing the market yet again for a potential IPO, hoping to spin a story of opportunity to grab market share from scandal-tainted industry leader Baidu (Nasdaq: BIDU). That story may sound attractive to investors unfamiliar with this perennial number-three in China’s search market, whose main shareholders are web portal Sohu (Nasdaq: SOHU) and Internet titan Tencent (HKEx: 700).

The only problem is that Sogou’s credibility is nearly nil these days, a direct result of the equally low credibility of controlling shareholder Sohu, which seizes on any opportunity to talk up IPOs for its various units. Accordingly, I will quite definitively go on the record saying this particular IPO won’t happen this year, and possibly not ever, regardless of what anyone at Sohu or Sogou says.

All that said, we should still take a look at the latest headlines on this potential listing, since it would certainly qualify as a relatively major event if it ever happened. The year ahead for offshore IPOs by big name private companies should be relatively quiet, though a couple of exceptions could be group buying leader Meituan-Dianping and financial services giant Ant Financial.

Perhaps Sohu is hoping to take advantage of the relative lull in activity by floating the possibility of an IPO for Sogou at the start of the year. Adding clout to the talk is the fact that news of the plan is coming from the unit’s CEO Wang Xiaochuan, in an interview with Bloomberg. But oddly enough, the same report that cites Wang also quotes a company spokesperson saying an IPO is “not on the agenda” right now.

According to Wang, Sogou would aim to list about 10 percent of its shares in such an IPO, in a deal that would value the company at $4-$5 billion. (English article) That would imply an IPO that could raise up to $500 million, which would be sizable in the current market. But Wang adds that Sogou hasn’t hired any investment banks, and the spokesperson comment indicates any IPO wouldn’t come until toward the end of this year at earliest.

To put some of this in perspective, Sohu itself only has a market value of $1.4 billion, after its shares lost more than a third of their value over the last year due to waning investor interesting. But even before the sell-down, Sohu still would have been worth just $1.8 billion. Sohu appears to own half to two-thirds of Sogou, and thus a $5 billion valuation would value Sohu’s stake at about $2.5 billion to $3 billion.

Value Illusion?

Anyone can see where I’m going with this argument. The valuation that Sogou is seeking would imply that the current Sohu has a negative valuation, since Sohu’s own market value is worth far less than what its Sogou stake would be worth at a $5 billion valuation. Of course perhaps that’s partly the point, since Sohu CEO Charles Zhang probably feels his company is underappreciated by investors.

Zhang and other Sohu sources have floated a wide number of similar plans in the past, and none has ever come to fruition. Those include a privatization of the company at one point, and possible IPOs for not only Sogou, but also the company’s money-losing online video unit. A look at the archives shows that similar talk of an IPO for Sogou occurred just two years ago, when reports said the company was eyeing a 2015 listing that could value the unit at up to $3 billion. (previous post)

This time around Wang is playing up the idea that Sogou could take advantage of a credibility cloud around Baidu, which was engulfed in a scandal last year involving its misleading search results. Baidu suffered a big hit from that scandal last spring, though it doesn’t appear that Sogou has really gained too much as a result.

All that brings us back to my original point, namely that Sogou and Sohu have little or no credibility when it comes to talk of IPOs or any other similar fund-raising deals. Zhang’s view that his company is underappreciated by investors is probably correct, but there’s good reason for that gap. Sogou is the oldest major search engine in the market after Baidu, but has seen its share mostly stagnate in the 10-15 percent region for years. That fact, coupled with the company’s own history of talk for IPOs that never happen, underpin my own view that this particular offering won’t happen this year and may never occur at all.


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