China's Internet Sector Is Buzzing

 | May 09, 2013 | 3:25 PM EDT
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The Chinese Internet space has been on fire of late.

There's an interesting rumor out today from Marbridge Daily that Sohu (SOHU) might be close to agreeing to sell its Sogou search engine to Baidu (BIDU), Qihoo 360 (QIHU) or Tencent.

A year ago, it seemed like Baidu had a lock on the Chinese search market. Google (GOOG) had abandoned the market a few years earlier, and Chinese netizens had nowhere to turn but to Baidu. It did a solid job in search.

However, starting about a year ago, Qihoo 360 dared to challenge Baidu's monopoly by getting into search. It has climbed to about 12% market share, and that has done wonders for Qihoo's stock price. Last year, when Citron Research was pushing allegations of fraud, Qihoo was trading around $15. The stock is now close to $40.

Qihoo's success is likely emboldening Tencent and Alibaba to also get into the search space. It's incredibly profitable, and since Baidu is at such a high share, there's ample margin for these bigger players to come in and get a piece.

Sogou has had decent but small share in search in China for some time. As one of these bigger players looks to come in to the space, it would make most sense to purchase Sogou and then look to build on that as a starting point.

According to the rumors from today, Qihoo has offered $1.4 billion to acquire Sogou. Yet Baidu has apparently offered even more. Apparently, Sohu's management and board is divided over which company to go with.

Sohu is mainly known for its portal business, where it sells ads. At present, its market cap is $2.1 billion. So any acquisition in the $1.4 billion range would be very significant for the company and its stock.

Chinese rumors are plentiful, so there's no way of knowing if this will happen. However, keep your eyes open.

Any kind of deal like this would be very significant for the space.

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