Sohu, PPTV Break Off Tie-Up Talks

Sohu, PPTV end talks

The latest reports saying web portal Sohu (Nasdaq: SOHU) has broken off talks to buy online video site PPTV don’t surprise me too much, as I’ve come to expect this kind of volatility these days from Sohu and its fickle Chairman Charles Zhang. After disappearing from his company for a year for unspecified personal issues, Zhang has suddenly come back and appears determined to make up for all the time he was away by making sure his company appears in the news headlines as much as possible in connection with a string of potential new tie-ups. This kind of frenetic activity seems like what we should expect these days from Zhang, who has suffered for more than a decade as the head of what I’ve previously dubbed China’s “biggest little Internet company.”The latest reports say Sohu’s talks for a potential merger of its video business with rival PPTV have broken down after a prolonged period of on-again-off-again discussions. (Chinese article) The reports cite 2 top executives at PPTV, who say disagreement on price was one of the main obstacles in the talks. That element of the equation became even more problematic when search leader Baidu (Nasdaq: BIDU) paid a pricey $370 million for comparably sized online video site PPS earlier this month, in what many considered a big premium to the company’s market value. (previous post)

Frankly speaking, I’m surprised that anyone is willing to talk with Zhang at all, as he has a reputation for being very fickle and also a bit difficult to work with because he always wants to be in control. Sohu’s name is seldom mentioned as an industry leader, which has frustrated Zhang over the years and has kept his company’s valuation relatively low. But that said, Sohu does have a number of units that look attractive as acquisition targets because all are within the top 5 of their respective categories, including portal, online games, video and search businesses.

Rumors of various talks involving Sohu have sprouted like weeds in the last few months, and I suspect at least part of the frenzy is being driven by Zhang’s desire to gain the top spot in at least one of his product areas. The buzz began back in March, when rumors surfaced that Sohu was in talks to privatize. (previous post) Sohu quickly put out a statement denying any such talks; but I suspect that some kind of investment banking activity was probably taking place behind the scenes, perhaps related to some of the non-stop M&A buzz that has flooded the market in the last 2-3 weeks.

Sohu came back into the headlines earlier this month, when a top executive confirmed the company was looking for a buyer of its Sogou unit, China’s third largest search engine. (previous post) Rumors emerged a week later that Sohu was in talks to merge with PPTV, and I speculated that perhaps Zhang was preparing to break up his company by selling off its various parts one by one. (previous post) Then more rumors emerged a week ago that Sohu was close to a deal to sell Sogou to Baidu as part of a more complex deal involving equity swaps between the 2 companies’ search and video units. (previous post)

The fact that nothing has been announced so far brings me back to my original point, which is that Zhang’s fickle nature means that lots of talks are probably happening behind the scenes but no one can reach a deal. I suspect that many of these potential partners are quickly tiring of and getting frustrated with Zhang, and in the end we could quite possibly see no deals at all. But at the same time, Sohu’s assets are too good for many potential buyers to ignore, which leads me to think we’ll probably see at least 1 or 2 new tie-ups involving Sohu and outside partners within the next month or two.

Bottom line: Sohu’s Chairman Charles Zhang is trying to form new partnerships for his company’s search and video units, with at least 1 new tie-up likely in the next 1-2 months.

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