July 20 (Bloomberg) -- Qihoo 360 Technology Co., a Beijing-based software developer, is in initial talks to buy Sohu.com Inc.’s Sogou unit to help it compete with Baidu Inc. for Internet searches in China.
Any deal will probably be financed with cash and stock, Qihoo Chief Financial Officer Alex Xu said by phone yesterday, declining to put a value on the size of a deal. Sogou is valued at about $1 billion to $1.4 billion, said Lucy Zhang, a Beijing-based analyst at Internet consulting group iResearch.
Combining Qihoo and Sogou would unite China’s second- and third-largest search engines to create a larger competitor to Baidu, which controls more than 80 percent of China Internet queries. Sohu said yesterday that it’s exploring options for Sogou, including seeking minority investors or pursuing a combination. It said it hasn’t yet picked a partner or deal.
“It makes strategic sense for Qihoo to pursue this deal,” said Elinor Leung, head of Asia telecommunications and Internet research at CLSA Ltd. in Hong Kong. “If they can acquire it they will exceed 20 percent market share for search. They can scale with it.”
Reuters earlier reported that Qihoo may buy Sogou.
Sogou accounted for 5.5 percent of search-engine queries in China in the March quarter, placing it in third place. Baidu had 82 percent and Qihoo 360 was in second place with 9 percent, according to data compiled by Bloomberg.
“If you want to be relevant, to challenge the dominant player Baidu, you need more market share,” said Alen Lin, a Hong Kong-based analyst with BNP Paribas Securities Asia, who has a hold rating on Qihoo. Even if it completes a deal, Qihoo would remain “the big underdog” in China’s search industry, said Lin.
Qihoo 360 said in a statement yesterday that no agreement has yet been reached with respect to a significant potential investment or strategic alliance.
Sohu.com rose 0.9 percent to $68.73 at the close in New York yesterday and has gained 45 percent this year. Qihoo rose 1.8 percent to $58.34, extending its advance in 2013 to 96 percent.
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