Last week I wrote about a rumor that Chinese Web portal Sohu (SOHU) would sell its Sogou search engine to either Qihoo 360 (QIHU) or Baidu (BIDU). Right after that, I went long Sohu. It's been a very profitable trade so far as the stock up to $63 from the high $50s last week.
The rumor was that Qihoo would pay $1.4 billion in a combination of cash and stock for Sogou. On Wednesday, Sohu CEO Charles Zhang seemed to deny that any search engine deal was imminent. But his language also seemed to indicate that he was leaving a door open.
If Qihoo were to buy Sogou, it would help bring its share of the search market in China up to about a 25%. But Baidu wants to prevent that to protect its near-monopolistic position. Friday, more rumors circulated that Baidu would acquire Sogou for between $2 billion and $2.5 billion. There's no word so far on what percentage of the final price would be cash vs. stock. If the deal is for real, Sogou will likely be integrated into Baidu's iQiyi subsidiary.
Neither company had confirmed the rumor as of Friday afternoon. But an announcement Monday before the U.S. market open could boost Sohu shares. Its current market cap is $2.4 billion, out of which it holds about $1 billion in cash and about $250 million in debt.
In a deal with Baidu, Sohu would have up to $3.5 billion in cash and Baidu stock. Though it would lose the Sogou revenue, it would still have revenue from its core portal ads and games. A $90 stock price for Sohu wouldn't be unreasonable on a $2.5 billion deal. Qihoo's stock would likely go up as well, as investors would be happy they didn't overpay. Baidu's stock, however, would probably fall on such news.
We'll just have to wait and see what happens Monday.