Qihoo Holders May Have to Settle for ‘OK’ Buyout Price: Real M&A

Hongyi Zhou
Qihoo 360 Technology Co. Chairman and CEO Hongyi Zhou. Photographer: Keith Bedford/Bloomberg

For Qihoo 360 Technology Co. shareholders, the buyout proposal from its chairman is probably as good as it’s going to get.

The operator of China’s second-biggest search engine said Wednesday that investors including Chairman and Chief Executive Officer Hongyi Zhou offered $77 for each American depositary share they don’t already own, valuing Qihoo at about $10 billion. While the bid is about 32 percent higher than the average price in the prior 20 days, it’s 60 cents lower than where analysts had seen the stock going on its own this year.

A buyer targeting an American company with Qihoo’s growth prospects could never get away with an offer like that, said Sachin Shah of Albert Fried & Co. Yet in the context of what other U.S.-listed Chinese buyout targets have been getting this year, Qihoo is actually making out pretty well.

“It’s an OK price,” Henry Guo, a San Francisco-based analyst at Summit Research Partners, said in a phone interview. “That is better than what we have seen so far. I think it’s very likely the deal goes through.”

Many of these buyouts are led by majority shareholders, giving smaller investors less room for pushback. The goal is to buy at a lower premium and then extract more value by relisting the company in China, where prices can be higher.

Buyers paid an average 14 percent premium in the last 12 months for take-private transactions of U.S.-listed Chinese companies valued at more than $500 million. Some smaller targets have received as little as a 5 percent bump. By contrast, Priceline Group Inc. last year paid a more than 50 percent premium for San Francisco-based OpenTable Inc., a company with a growth rate less than half that of Qihoo’s.

Prior Slump

While Qihoo jumped as much as 10 percent on Wednesday in New York, it closed about $7 below the chairman’s offer, signaling investors agree with Guo that the deal price won’t be increased. The company had slumped 23 percent in the year before the take-private proposal was announced amid growing competition.

Alternative bidders are likely few and far between because it’s difficult for foreign companies to compete with Chinese rivals in their home country. Many may not want to take that risk with a Qihoo purchase, Shah at Albert Fried said.

“There are barriers to entry for even making the offer, even if you had a check,” he said.

The investor group is likely betting that it can eventually relist Qihoo in China or sell the company to a strategic bidder at a higher valuation. That’s been the driving force for the $22 billion in buyouts this year of Chinese companies trading on U.S. exchanges. With 20 deals announced, activity is on track for a record.

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