Rocky Marriage Ahead For Sohu, Tencent

Sogou gets new master in Tencent

Thank goodness! That’s my first and main reaction to news that after months of tortured courtship, Sohu (Nasdaq: SOHU) has finally selected Tencent (HKEx: 700) as the winning suitor of its Sogou search engine, beating out rivals Baidu (Nasdaq: BIDU) and Qihoo (NYSE: QIHU). I have to admit the selection of Tencent came as a bit of a surprise, since I had expected Qihoo to win the contest for one of China’s older and less appreciated search engines.

Now that the knot is finally tied in this somewhat unlikely marriage, the real work will begin as Tencent is forced to work with the opinionated and sometimes difficult Sohu chief Charles Zhang. Success in the years ahead is far from guaranteed, and I could even see this new marriage ultimately ending in divorce due to personality clashes. Such a divorce wouldn’t be the first for Sogou, which saw previous strategic investor Alibaba dump its 10 percent stake in the search engine a year ago.

All that said, let’s take a closer look at this newly announced marriage, which comes 4 months after word news first emerged that Sohu was looking to sell some or all of Sogou. (previous post) The new tie-up will see Tencent purchase 36.5 percent of Sogou for $448 million, valuing Sogou at about $1.2 billion — about half of Sohu’s current market value. (company announcement; Chinese article) Sohu shares shot up 7.5 percent to near a 2 year high after the announcement, and have rallied sharply in general since the company first disclosed its plans to sell some or all of Sogou.

The deal will see the 2 companies merge Sogou with Soso, Tencent’s own search engine that has struggled to find an audience. Sogou’s current CEO Wang Xiaochuan will continue at the helm of the new company, though he will be overseen by Charles Zhang, who will be Sogou’s chairman. Wang will also have new bosses in the form of Tencent’s President Martin Lau and its COO Mark Ren, who will both join Sogou’s board.

The final valuation for Sogou is about the same as the $1.2 billion to $1.4 billion that Qihoo was prepared to pay when it was reportedly on the cusp of a deal to buy all of Sogou back in July. (previous post) That deal must have collapsed, probably because Zhang didn’t want to yield control of Sogou to Qihoo, which has an equally opinionated chief in the outspoken Zhou Hongyi.

Following the Tencent deal, Zhou Hongyi actually congratulated Zhang on getting a good price, and wished him and Sogou success. (Chinese article) Zhou was hoping to purchase Sogou to combine its 10 percent share of China’s search market with Qihoo’s So.com search engine, which controls nearly 20 percent of the market just a year after its launch.

Personally speaking, I’m glad that Zhang has finally found a partner and the rumors about a Sogou sale will stop. Now that the sale is almost complete, the real work will begin for Zhang and Sogou. On the surface, this deal looks like a good one, as it will combine Sogou’s relatively strong position in China’s search market with Tencent’s deep resources, including some of China’s most popular social networking and online gaming services.

But in reality, I do see difficult times ahead for this marriage due to the personalities involved, most notably Zhang. I think Zhang made the right decision by avoiding Qihoo, as he and Zhou Hongyi inevitably would have clashed on many issues due to their strong personalities. But Tencent is unlikely to just sit back and let Zhang do whatever he wants, and I expect he will clash with both Lau and Ren on Sogou’s future development. Accordingly, I wouldn’t be surprised to see this marriage end in divorce the next 1-2 years, with Tencent ultimately selling its newly acquired Sogou stake.

Bottom line: The tie-up between Sohu’s Sogou search engine and Tencent is likely to end in divorce in the next 1-2 years due to personality clashes.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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