Sohu, Qihoo Near Search Marriage

Sohu nears deal to sell Sogou to Qihoo

Two months after reports first emerged that web portal Sohu (Nasdaq: SOHU) was looking to sell its Sogou search engine, it appears a sale may finally be imminent to security software maker Qihoo 360 (NYSE: QIHU). If indeed the latest reports are true, the big winner from such a sale would be Qihoo, which would combine its own search service with Sogou to create a major new player with a quarter of China’s search market. China tech watchers like myself will also be happy to see this story finally disappear from the headlines, following a non-stop string of mixed signals since early May from Sohu’s fickle and frustrated founder and Chairman Charles Zhang.

According to the latest headlines, Sohu is on the cusp of finally signing a deal to sell Sogou to Qihoo for either $1.2 billion or $1.4 billion, depending on which report you believe. (English article; Chinese article) One report says Qihoo Chairman Zhou Hongyi recently flew to the US to meet with Sohu CFO Carol Yu for final negotiations, and that Qihoo would purchase Sogou by issuing new stock equivalent to 30 percent of its existing share count. The report says Charles Zhang would become co-chairman of Qihoo after the merger.

The deal looks quite interesting from a numbers perspective, since and Sogou are currently China’s second and third largest search engines, behind only sector leader Baidu (Nasdaq: BIDU). A combination of’s current share of about 16 percent with Sogou’s 9 percent would create a player with about a quarter of the China search market. That would instantly become a strong second-place player to Baidu, which has about two-thirds of the market. The last player to mount such a serious challenge to Baidu was Google (Nasdaq: GOOG), which once controlled about a third of the market before its high-profile pull-out from China after a spat with Beijing over self-censorship policies.

The deal also looks interesting from a market valuation perspective, since the sale price would represent about half of Sohu’s current market value that now stands at about $2.5 billion. Sohu’s other publicly listed unit, online gaming firm Changyou (Nasdaq: CYOU), has a current market value of about $1.8 billion. The company’s other major units include its original portal business, and its fast-growing online video business. Anyone who does some simple math will realize that the sum of the value of these 4 units alone is easily bigger than Sohu’s current market value, meaning there’s probably some good upside potential for the company’s share price.

Sensing that potential upside, investors have been bidding up Sohu’s share price steadily since rumors of the Sogou sale first emerged. Sohu’s stock is up nearly 40 percent over the last 3 months alone. Qihoo shares, meanwhile, have risen an even stronger 80 percent over the same period, as investors get excited about the company’s potential to challenge Baidu in the lucrative online search space.

After all the rumors of the past few months, I would put the chances of a deal finally closing by the end of July relatively high, perhaps around 80 percent. I’ve said before that this deal looks like a very good fit for both Qihoo and Sohu, as the combination of their search businesses could create a very attractive new search company.

The big uncertainty in this new marriage is Charles Zhang, who has a reputation as a difficult person to work with. Perhaps the only person in the Chinese Internet world with an even worse reputation is Zhou Hongyi. If the reports are true that Zhang and Zhou will share the chairman title at the combined search company, we could potentially see some trouble as these 2 opinionated men clash for control of the company. At the end of the day, I suspect that Zhou would emerge the victor of any such clash, and that a combined and Sogou would ultimately emerge as a very strong player in the China online search market over the next 2 years.

Bottom line: Sohu is likely to close the sale of its Sogou search engine to Qihoo by the end of this month, creating a strong rival to sector leader Baidu.

Related posts:



(Visited 92 times, 1 visits today)