Tencent Buys $448 Million Stake in Sohu Unit to Win Users

Tencent Holdings Ltd., Asia’s largest Internet company, paid $448 million for a stake in China’s third-largest search engine to expand its Web offerings in the world’s largest market.

Tencent bought a 36.5 percent stake in Sohu.com Inc.’s Sogou search unit with an option to increase the investment to 40 percent, according to a joint statement by the companies yesterday. Sohu will remain the controlling shareholder.

Joining forces could help the companies compete against Baidu Inc. in search and mobile Internet as users spend more time on smartphones and tablet computers. China’s online population surged almost sevenfold since Tencent’s 2004 initial public offering, with revenue at billionaire Pony Ma’s company more than doubling in the past two years.

“It’s the final piece of the puzzle that Tencent needs, which is to take over all the platforms on the Internet,” said Billy Leung, an analyst at RHB Research Institute Sdn. in Hong Kong. “Sogou’s a good target, and it has a good search system.”

Tencent fell 0.6 percent to HK$418.80 as of 10:26 a.m. in Hong Kong. The deal seemed “defensive,” and the price seemed high for certain assets of Sogou, Nomura Holdings Inc. analyst Jin Yoon wrote in a note.

Sohu surged 7.5 percent, the most since March 5, to close at $69.61 in New York yesterday. The deal can boost Sohu’s value by $7 per share, 86Research Ltd. analysts estimated.

Qihoo Talks

Sogou accounted for 5.5 percent of search-engine queries in China in the March quarter. Baidu had 82 percent and Qihoo 360 Technology Co. followed with 9 percent, according to data compiled by Bloomberg.

In July, Qihoo said it was in talks to buy Sogou. Charles Zhang, Sohu’s chairman and chief executive officer, said that those talks have ended and the company won’t seek additional investors for its search unit in the “near future.” Qihoo’s American depositary receipts slumped 5.6 percent to $82.93 yesterday, the biggest decline since Aug. 15.

“Tencent’s investment means that it is betting its future on mobile search with Sogou,” Zhang said in a phone interview yesterday. “With Tencent’s support, Sogou’s search market share can be secured and the search business will provide good user access to our media and entertainment services.”

Zhang will remain chairman of Sogou and Wang Xiaochuan will remain CEO. Tencent President Martin Lau will join the search division’s board.

Tencent and Sogou will jointly develop and integrate their services in areas including search and data sharing, according to the statement. Tencent will merge its own search unit with Sogou.

Sogou’s top products, including Sogou Pinyin and Sogou Search, will have access to Tencent’s online and mobile user base, according to the statement.

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