Sohu: On The Breakup Path?

Sohu: headed for break-up?

A sudden flurry of activity has caught my attention at Sohu (Nasdaq: SOHU), one of China’s oldest Internet portals, which has splashed into the headlines several times in the last couple of months after years of being ignored by investors. What has most caught my attention most this time around was a comment in one of the recent reports that Sohu founder and Chairman Charles Zhang was recently experiencing some kind of emotional fatigue, which leads me to wonder if the company may be headed for a breakup.The latest reports have cited unnamed sources saying that Zhang wants to sell his company’s search engine, Sogou, and has allowed the unit’s CEO Wang Xiaochuan to handle the deal. That’s quite an important development, as Zhang has been an extremely hands-on boss throughout Sohu’s more than a decade as a publicly listed company, taking a very active role in all of its major decisions. That leads me to my next speculation, that perhaps Zhang is finally loosening his grip on his underperforming empire, which I’ve previously dubbed “China’s biggest little Internet company.” If he is, then perhaps we could soon see a partial or even complete breakup of Sohu sometime in the not-too-distant future.

Before I go any further, let’s recap some of the increasingly frequent buzz that’s been in the news around Sohu over the last year. The company first made headlines about a year ago when it repurchased an 11 percent stake of Sogou that was previously owned by e-commerce leader Alibaba. At the same time, it has been trying to separately list its online video business in New York for much of the past year, but has failed due to a chilly US investor environment towards China Internet stocks.

Then a couple of months ago, the company suddenly splashed back into the headlines with rumors that it was talking with private equity firms about a potential privatization. (previous post) Sohu’s shares soared on those rumors, but the company quickly put out a statement denying there was any such talk.

Now there’s the latest buzz about selling Sogou, which emerged last week and seems credible since it contains extensive details. According to the reports last week, search leader Baidu (Nasdaq: BIDU), security software specialist Qihoo 360 (NYSE: QIHU) and social networking giant Tencent (HKEx: 700) have all expressed interest in Sogou, with Qihoo emerging as an early frontrunner. The latest reports cite Sogou CEO Wang confirming that talks are indeed continuing and Qihoo is a frontrunner, but adding there is no final agreement yet. (Chinese article)

So, what can a person deduce from all of this recent activity? I suspect that some real talks were occurring at the time of the privatization rumors in March, and that perhaps those talks involved a Sogou sale or maybe a spin-off or sale of the video business, which is probably losing money. Now would certainly be a good time to sell one or both businesses, as China’s top Internet companies have suddenly shown an interest in buying these kinds of assets for big premiums. In the last few weeks alone, Baidu has made a major purchase in the online video space, while Alibaba has made big buys in social networking and the mobile Internet.

If Zhang really is finally loosening his grip on his company, I wouldn’t be surprised to see him sell not only Sogou, but also perhaps his video business in the next few months. He could even look to sell his company’s online game business, the separately listed Changyou (Nasdaq: CYOU). All of that leads me to my final speculation, that perhaps Zhang has finally tired of running his Sohu empire, which could lead him to eventually sell the company itself, consisting mostly of its original portal business, once he has sold most of its other major assets.

Bottom line: A recent flurry of news around Sohu could indicate that founder Charles Zhang is tiring of running the firm, with a possible breakup in the offing.

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