Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The buyout price for Qihoo 360 Technology is still just OK the second time around.   

An investor group led by Qihoo Chairman Hongyi Zhou is close to following through on a preliminary offer made in June to buy the Chinese Internet-security company, the Wall Street Journal reported Tuesday. The proposed price is roughly the same as it was this summer at about $77 for each American depositary receipt the group doesn't already own. (A U.S.-based representative for Qihoo declined to comment.) 

On the one hand, shareholders of the $9 billion company should count themselves lucky that the acquiring group isn't lowering the price. Zhou's pursuit of Qihoo is the largest deal in a record year for management buyouts of U.S.-listed Chinese companies. The goal of these takeovers was to buy at a low premium and extract more value by relisting in China's booming stock market. When that stock market stopped booming over the summer amid concerns of an economic slowdown, the U.S.-listed companies slumped and some targets -- Mindray Medical and E-House China Holdings -- were presented with reduced offers.  

Back To The Future
Qihoo shares have recovered from their summer rout.
Source: Bloomberg

But Qihoo shares didn't stay down. After falling to an almost two-year low of $42.21 in September, the stock has recovered back to the high $60s -- around where it was trading before Zhou made his offer. While the prospect of a buyout was likely providing some support for the stock, Qihoo was giving investors other reasons to take comfort.

The company beat analysts' estimates for adjusted earnings per share in the second quarter. Despite all the noise from China, analysts are calling for roughly the same amount of 2015 revenue for Qihoo as they were in back June. Projections for 2016 have been adjusted down, but Qihoo is still on track for faster growth than most big Internet companies. Qihoo's projected revenue gains over the next few years actually don't look too dissimilar to those forecast for Facebook.

Not Too Shabby
Buyers would pay much more for Qihoo's growth rate if it were a U.S. company.
Source: Bloomberg

Try telling Facebook -- whose enterprise value is about 18 times the revenue it brought in over the last year -- that it should accept a buyout offer with an implied revenue multiple of about half that. Facebook isn't a perfect comparison to Qihoo. The company, like many Chinese operators, has faced questions about its accounting and the veracity of its reported results. And the Chinese economy is still in flux. So some discount is probably justified, but even so the contrast is stark.  

When buyouts of U.S.-listed Chinese companies were reaching a frenzy earlier this year, the common thinking was that minority investors had little room to fight back against what were often miniscule premiums from majority holders. That perception is changing. Heng Ren Investments successfully pushed for more money in the takeover of dating-site Jiayuan.com International. Other investors have risen up to protest low-ball offers for companies including social-networking site owner Renren and stem-cell storage provider China Cord Blood.

Qihoo, to be fair, is getting a richer premium than most larger U.S.-listed Chinese buyout targets have commanded this year. But investors may need to be convinced there's not more value to be had.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net