July 22 (Bloomberg) -- Baidu Inc.’s grip on the Internet in China, where it handles more than 80 percent of online queries, is forcing the nation’s second- and third-biggest search engines to consider a merger.
Qihoo 360 Technology Co is in initial talks to buy Sohu.com Inc’s Sogou unit, a deal that would probably be financed with cash and stock, Qihoo Chief Financial Officer Alex Xu said by phone on July 19. He declined to value Sogou, which the market estimates is worth $1 billion to $1.4 billion, according to Lucy Zhang, a Beijing-based analyst at Internet consulting group iResearch.
Baidu strengthened its dominance last week with a $1.9 billion deal to buy app store 91 Wireless, the most expensive acquisition announced by a China-based technology company, according to data compiled by Bloomberg. China had 591 million web users at the end of June, a greater number than the total population of any other country except India, according to the China Internet Network Information Center.
“With Sogou’s listing prospects getting dimmer, it makes sense for it to join forces with Qihoo to compete with Baidu,” Zhang said. “The two combined would have much better control of mobile Internet entry points.”
Qihoo’s American depositary receipts fell 4.5 percent to $52.81 on July 16, following Baidu’s acquisition of 91 Wireless.
Qihoo, which started operating a search engine service in August last year, charges advertising fees “at a significant discount to Baidu,” Alicia Yap, an analyst at Barclays Plc in Hong Kong, said in a June research report.
Sogou accounted for 5.5 percent of search-engine queries in China in the March quarter, the third-largest share. Baidu had 82 percent and Qihoo 360 was in second place with 9 percent, according to data compiled by Bloomberg.
“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.”
Joining forces could also help the companies compete against Baidu on the mobile Internet, as more users spend time on smartphones and tablet devices.
The number of people who accessed the Internet via mobile devices rose 10 percent to 464 million in China by the end of June from the end of December, according to the China Internet Network Information Center.
Baidu acquired app store 91 Wireless to maintain better control of access points and gain more users, Echo He, an analyst at Maxim Group LLC in New York, said in a July report. It’s uncertain whether the acquisition will sustainably help Baidu attract more users, she said.
There’s no consensus on which app store holds the largest market share in China. Qihoo estimates it has about 30 percent of China’s mobile app store market share, Barclays’s Yap said in her report. NetDragon said 91 Wireless, the company it’s selling to Baidu, is the largest third-party distributor by active users, citing iResearch data.
Qihoo 360 said in a July 19 statement no agreement has yet been reached with respect to a significant potential investment or strategic alliance.
Sohu is exploring options for Sogou, including seeking minority investors or pursuing a combination, it said in a July 19 press release. It said it hasn’t yet picked a partner or reached a deal.
Sohu.com rose 0.9 percent to $68.73 at the close in New York on July 19 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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