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Buy your own Google for only $3B! An analysis of recent BIDU takeover rumors. 2006-11-01 13:16:44
Submitted by: admin
Yesterday, BIDU posted record earnings of $0.31 per share for Q3 2006. BIDU currently has a P/E around 100, and has had earnings growth of approximately 450% during the last year.
Today and yesterday BIDU has been hit due to the guidance which was posted about 6% lower than many analysts were expecting.
Historical Rumor Data
StockRumors.com has reported takeover rumors on BIDU as early as August, 2005. Throughout the entire year BIDU takeover rumors have circulated, but they specifically picked up steam in early June, and lost it after GOOG sold their position in mid June. In August and September, takeover rumors circulated again.
In the past, BIDU has been rumored as a GOOG (most prominently) or YHOO takeover target. There have also been rumors of an LBO (Leveraged Buyout) on BIDU, and several firms may have started to make a move.
Analysis of the Rumors
In June, BIDU had over $1B in cash, and today has a market cap of only $2.8B. A company that has roughly 35% of its market cap in cash could definitely be a target of a Leveraged buyout.
An acquisition of BIDU has the feel of “Buying your own Google”:
China is such an important market for internet based companies, as internet access and use is growing exponentially (with growth of at least 41% since 2003) and in 2005 had 111 million internet users (source here). By 2010, China is predicted to have more than 250 million internet users (source here). The United States in 2005 only had 200 million internet users (source here), and so the Chinese market grows much faster than the market in the United States. The Chinese and English Languages have comparable numbers of people who speak them, but a much higher percentage of Chinese speakers are native speakers, while roughly a third of English speakers are not. In other words, growth in the Chinese market could significantly outpace that in the English market.
In 2005, BIDU had 46.5% of the Chinese search market share. In 2006, it is estimated that they control now well over 60% of the search market share in China.
Search engines are at an early stage in China, as the Chinese access to the internet has been limited and controlled. However, BIDU has been dominating the search market. Some cite the nuances of the market – which it appears BIDU understands – along with greater support from the Chinese government to be the difference.
GOOG
GOOG currently has a P/E of 60, has cash of roughly $10B and a market cap of $146B. GOOG completed the $1.6B acquisition of YouTube entirely in stock, so their cash reserves weren’t at all depleted. GOOG still needs to spend some of its cash, and rumors of a takeover of YHOO and BIDU have been prevalent recently.
Google has had trouble picking up market share in China for internet searches. In 2005, GOOG had only 26.9%. It is estimated that in 2006, GOOG will only have between 20% and 25%. In other words, Google is losing market share in China to Baidu.
Because of the importance of getting market share at the beginning, and due to the difficulty in getting it, BIDU could be an extremely attractive acquisition for GOOG. GOOG would definitely benefit from such an acquisition. By acquiring BIDU, Google would increase its market share in China to over 75% - definitely very tempting.
Important Note on Google’s possible interest in Baidu: Earlier this year, GOOG had a significant stake in BIDU, but sold it in mid June, signaling that they were not interested in an acquisition of BIDU at the time.
YHOO
Yahoo has had even more difficulty picking up market share in China than Google has, had less than 16% of the market share, and is losing it slowly. With a market cap of $36B, and cash reserves of $2B, YHOO could probably get the growth that it has felt pressure from investors to get by acquiring BIDU. YHOO has not posted stellar growth in the past and has recently maintained a low P/E of around 25.
If YHOO were to acquire BIDU, their market share would more than quadruple to almost 80% in China, and they would significantly beat GOOG in market share – which would most likely excite investors. Instead of losing market share in China, Yahoo would be gaining market share in one of the biggest future search engine markets.
As BIDU continues to gain market share in China without a significant increase in the P/E ratio (and with the recent decrease), BIDU has become and is becoming an increasingly attractive takeover target to anyone interested in the Chinese search market.
Note: This blog is intended to analyze only the rumors, and is not intended to analyze the stocks themselves. By using this site you agree that before making any financial decision you will consult both your attorney and your financial advisor.
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