Sohu.com Inc (
surged 7.51% ($4.86) to close at $69.61 on Sep 16, after the
Internet service provider announced a partnership with Chinese
e-commerce provider Tencent Holdings Limited.
Under the terms of the deal, Tencent agreed to invest $448.0
million in cash to acquire a 36.5% stake in Sogou (Sohu's search
business), which can be increased to 40.0% in the future.
Tencent's Soso search related business and certain other assets
will be merged with Sogou. Sohu will hold the controlling
interest in Sogou, which will continue to operate as a subsidiary
Sohu Chairman and CEO Charles Zhang will remain Sogou's chairman.
Tencent president Martin Lau and chief operating officer Mark Ren
have joined Sogou's board of directors, as per the terms of the
The Sohu-Tencent partnership will improve Sogou's competitive
position against market leader
Baidu Inc. (
Qihoo 360 Technologies (
, which ranks second in both PC and mobile search market, going
The deal particularly hurts Qihoo's prospects as it was looking
to challenge Baidu in the search market. Qihoo launched its own
search engine in Aug 2012 and reached the second position with
18.0% market share within a short span of time.
Sohu and Qihoo had been engaged in active discussions regarding
the sale of the Sogou search engine. However, talks broke down in
mid-August, this year. Qihoo shares plunged 5.61% ($4.93) to
close at $82.93 on Sep 16.
Tencent's strong mobile user base will boost Sohu's mobile search
traffic. Sogou will become the default search engine for
Tencent's mobile browser. Tencent will also promote Sogou's
mobile input method on mobile platforms such as mobile QQ and
The partnership will boost Sohu's user base and market share,
which will further improve monetization efficiencies over the
long term. Sohu expects Sogou to grow at a faster rate in 2014
based on the synergies from this partnership.
We believe that Tencent's investment will improve Sohu's
liquidity, which will help it to invest further on developing
video and other services. We believe that Sohu's innovative
product pipeline and monetization efforts by selling mobile ads
on video for
iPad will drive top-line growth going forward.
However, continuing investments in product development will keep
margins under pressure in the near term. Despite higher spending
and the recent partnership, we believe that market share gain
will be difficult in the near term due to stiff competition in
most of its operating markets.
Currently, Sohu has a Zacks Rank #5 (Strong Sell).
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