The ongoing game of musical chairs in China’s online search space is continuing this week with word that Internet portal Sohu (Nasdaq: SOHU) wants to sell its Sogou unit, operator of China’s third largest search engine. While many of the previous rumors of consolidation in the search space have looked dubious to me, this one actually looks like it could be credible for a number of reasons I’ll detail shortly. If it’s true, I would also commend Sohu for making a shrewd move by getting out of a crowded market where it has limited resources and expertise compared with other players.The latest reports cite an unnamed source saying that Sohu has been shopping Sogou around, with Baidu (Nasdaq: BIDU), Qihoo 360 (NYSE: QIHU) and Tencent (HKEx: 700) all expressing interest. (Chinese article) Baidu is China’s dominant search engine with about two-thirds of the market, while Qihoo has mounted a serious challenge over the last year with the launch of its so.com engine that now controls about 15 percent of the market. Meantime, leading Internet firm Tencent has had less success with its soso.com search engine, but has repeatedly indicated it is committed to the area.
Market rumors last year indicated Qihoo and Sogou might be seeking a tie-up of some sort (previous post), and the latest reports say Qihoo has been the most aggressive suitor in the current bidding. The reports also say that Baidu is willing to pay more for Sogou, which also doesn’t surprise me since Baidu has previously said it’s in the market to make some major acquisitions to boost its business. Earlier this week, it formally announced it would buy most of PPS for $370 million and combine that with its own iQiyi unit to create the nation’s second largest online video platform. (company announcement)
The source in this latest report says Sogou’s CEO Wang Xiaochuan favors a sale to Qihoo, while Sohu Chairman Charles Zhang favors Baidu. In this case, we can actually put a relatively precise valuation on a sale since e-commerce leader Alibaba formerly owned 11 percent of Sogou but sold it back to Sohu about a year ago in a deal that valued the unit at about $240 million. The latest report indicates Qihoo may be willing to pay quite a bit more than that, saying it is offering up to $1.4 billion, though that figure looks quite high to me.
So why do I think these reports may be true this time, and what would this mean for China’s search market? For starters, Sohu’s shares jumped 7 percent in Wednesday trade in New York, indicating investors believe something may be happening. The level of detail in this latest report also seems to indicate that talks are at a relatively advanced stage. And last but not least, this move makes strategic sense for Sohu, which has been struggling for years to build up Sogou but lacks the resources to compete with the bigger names like Baidu and Tencent.
In terms of broader implications, I personally think that a Qihoo-Sogou tie-up makes the most sense and is the most likely outcome if a deal is reached. Such a pairing would create a very solid new challenger to Baidu with a combined market share of about 24 percent. Baidu itself might be reluctant to bid aggressively for Sogou since its already high market share means such a combination could easily get rejected by China’s anti-monopoly regulator. At the end of the day, this deal does indeed look like a good one that could boost Qihoo if it ends up buying Sogou, breathing new life and competition into China’s online search market.
Bottom line: Reports that Sohu may be looking to sell its Sogou search engine look credibile, with Qihoo the most likely buyer.