Tencent, the Chinese internet group, has taken a 36.5 per cent stake in domestic rival Sogou, further expanding its reach at a transformative time for the country’s internet industry.
China’s biggest internet group, which on Monday saw its market capitalisation surpass US$100bn for the first time, paid US$448 million for the stake and merged its Soso search business with its new partner.
Tencent’s stake could increase to 40 per cent although Sogou’s parent - Nasdaq-listed Sohu - will remain the controlling shareholder and Sogou will continue to be an independent subsidiary.
As part of the deal, Tencent and Sogou agreed to jointly develop and integrate their respective products and services, while collaborating in areas of search technology and data sharing.
Soso, Tencent’s search business, is relatively small and so should benefit hugely from being merged with Sogou, China’s third largest search engine according to CNZZ, a Chinese industry analyst group.
“We are confident that Sogou, after combination with Soso, will deliver superior search experiences to users on our social, browser and content platforms, especially on the mobile front,” said Ma Huateng, chairman and chief executive of Tencent.
Tencent’s other products include popular messaging services QQ, Weixin and WeChat; Qzone for social networking; the QQ game platform for online games; and an ecommerce platform.
Meanwhile, Sogou’s products include Sogou Pinyin and Sogou Search, which will now have direct access to Tencent’s vast online and mobile social communities.
The move comes at an exciting time for the industry in China, with Tencent battling Baidu, Sina Corp and Alibaba for market share across various platforms in an increasingly competitive business.
Diversification is key, which has led to various deals recently, including Alibaba’s purchase of a 18 per cent stake in Sina’s Weibo microblog, and Baidu’s acquisition of 91 Wireless, which runs one of China’s largest mobile app stores.
Qihoo 360, a Chinese software group, and Nasdaq-listed Baidu, which offers diverse internet services, were also understood to have been interested in acquiring Sogou. Qihoo said in July that it was in talks with Sohu about an investment in Sogou that could have been worth US$1.4 billion.
At that time analysts said Qihoo could have controlled a quarter of the search engine market in China after the deal. Qihoo also issued a US$600 million convertible bond last month to help fund the possible deal.
However, Tencent beat both to the punch.
“This partnership will immediately expand Sogou’s market presence and significantly elevate its position in the highly competitive PC search market, and even more so in the rapidly evolving mobile search market,” said Dr Charles Zhang, Sohu’s chairman and chief executive, in a statement.
Based on Monday’s closing share price, Tencent’s market capitalisation is HK$782.8 billion (US$100.9 billion), making it one of the highest valued technology companies in the world, taking it close to Facebook, valued at US$107.9 billion, according to Bloomberg.
Following the deal, Zhang will remain chairman of Sogou. Martin Lau, president of Tencent, and Mark Ren, chief operating officer of Tencent, will join Sogou’s board. Wang Xiaochuan will continue to lead Sogou as a director and CEO.
Credit Suisse acted as financial advisor to Sohu. Goldman Sachs acted as financial advisor to Tencent.