Robin Li's failure to buy iQiyi from Baidu is a victory for everyone. Including Li himself.
Baidu's billionaire founder and chairman probably doesn't feel like a winner right now, considering his attempt to purchase the web giant's unprofitable video-streaming service was rebuffed just last week.
Yet there are multiple reasons to conclude that this is the best outcome for all parties.
1) Li doesn't need the distraction: Buying out the Netflix-like business from the company he runs adds a lot of extra work to a man who's already got his hands full dealing with regulatory issues, a bruising offline services battle with Alibaba and Tencent and a slowing Chinese economy.
Attempting to run, and turnaround, an unprofitable video-streaming outfit amid these challenges doesn't serve Baidu's shareholders well, even if Li were to keep day-to-day operations in the hands of iQiyi CEO Yu Gong.
2) The deal's failure is a victory for corporate governance: Baidu's press release says a lot about the five-month process Li's consortium (referred to as the Buyer Group) had to go through to convince Baidu's board:
The Buyer Group and Baidu had not been able to reach an agreement on transaction structure and purchase price after rounds of discussions and negotiations.
Remember, the board is chaired by the head of the buying consortium. The fact that they even needed to negotiate is progress in China, where the line between an individual's concurrent roles as shareholder, chairman and management executive are often blurred, if not exploited. A skeptical observer would be right to question whether the aforementioned statement was the true reason for backing out. To be sure, it's probably not the only reason, yet the fact that both parties even make the pretense is a small win for shareholders in general.
3) There's value to be found in iQiyi, somewhere: The fact that iQiyi's two leading insiders saw fit to make an offer shows they reckon the unit's future value does, or could, exceed the value Baidu is extracting from it now (which is sub-zero). At the very least, they surely concluded it was worth more than the $2.8 billion enterprise value their bid gave it.
Of course, some or all of that value is connected to the possibility of the business being carved out of its U.S.-listed parent and taken public in China, where valuations are higher. And no doubt the decision to back out is in turn tied -- loosely or tightly -- to the increasing difficulty of relistings in China of U.S.-traded stocks. That said, everyone is now forced to look a little more closely at Baidu's business and its potential, which leads to the next point:
4) Baidu can now work to improve iQiyi, not dump it: At some point in time, Baidu's board and its management felt that having a video-streaming service was a good idea. More recently, selling the unprofitable operation was seen by some as important to trimming costs and boosting margins.
On a pure P&L level, that analysis is correct. But strategically, Baidu knows it needs to look beyond BOS (boring old search) and find new ways to attract revenue and advertisers. It's currently spending big bucks to get consumers to turn to Baidu for online-to-offline services like food delivery and movie tickets. At the same time, its paid-search business is under siege from regulators, not to mention a slowing economy and more diverse choices for advertisers. Rather than trimming its offering back to BOS, Baidu needs to expand its suite of products and integrate them through its reams of data.
Once Li has accepted this loss he can get back to scoring some wins for shareholders, of which he is one.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Tim Culpan in Taipei at firstname.lastname@example.org
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