Sohu will exchange 4.4 million shares, or 12.5% of the company for 100% of ChinaRen. The transaction values ChinaRen at $30.8 million, based on Sohu's closing share price Wednesday of $7.00. Sohu's Nasdaq-listed shares have fallen 49.2% from a 52-week high of $13.78 on July 12.
The combined companies will have 44 million average page views a day and 7.8 million registered users. Sohu currently has 26 million page views and ChinaRen has 18 million. Sohu has 4.8 million registered users compared to 3 million for ChinaRen. ChinaRen's audience is made up mainly of young city-dwellers. Its biggest investors include Goldman Sachs, Kohlberg Kravis Roberts and Joho Capital.
"With Sohu strong on comprehensive content and search, and ChinaRen.com strong on sticky community services, the two companies naturally complement each other," says Charles Zhang, Sohu's chief executive officer.
The move comes as China's internet companies fight for dominance in what many expect will be one of the largest internet markets in the world. According to Deutsche Bank, China now has 17 million internet users. The bank expects that figure to rise to 86 million by 2004 as the cost of access, access devices and bandwidth declines. Sohu's purchase of ChinaRen is one of many mergers and acquisitions expected among China's 500 portals as advertisers gravitate to the biggest players with the most extensive reach.
In acquiring ChinaRen, Sohu is attempting to plug a gap in its site that rivals such as Netease.com had threatened to exploit; namely community services that bring together internet users through chat rooms, online auctions, e-mail and instant messaging. Sohu originated as a search engine modeled on Yahoo!. It gradually expanded its content and is now taking steps to become more interactive. That may be easier said than done.
"There's a question of how the companies will integrate their systems," says Antonio Tambunan, an analyst at Deutsche Bank. "How much cross-over will there be? Will there be any reason for a ChinaRen user to go to Sohu? If I advertise with Sohu, how many people will see it on ChinaRen?"
Sohu says it plans to maintain the ChinaRen brand. Unlike Sina.com, which is available in the US, Sohu says it will focus on the China market. ChinaRen aims to become the country's leading youth site.