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On Monday (27 July), Tencent Holdings Ltd (SEHK: 700) was reported to have proposed buying out the Chinese search engine, Sogou Inc (NYSE: SOGO).
Sogou has long been a competitor to Baidu Inc (NASDAQ: BIDU). A transaction like this can give Sogou the full backing from the Internet giant Tencent to compete against Baidu.
Baidu’s share price dropped by almost 3% on Monday after the news surfaced.
In this article, I’ll take a look at what is wrong with Baidu and how Tencent is taking on the company in search with this potential acquisition.
The sick man of BAT
Similar to the FAANG stocks known widely all over the world, BAT (Baidu, Alibaba, Tencent) stocks were the equivalent of FAANG in China. But that was a few years ago.
Baidu’s share price hit an all-time high of around US$284 in May 2018. Since then, its share price has tumbled by almost 60%.
With Baidu falling behind and out of favour, the term BAT also marks the end of an era.
What’s wrong with Baidu?
The shortcomings of Baidu have puzzled many overseas investors since it still dominates the online search market in China. Even today, it has an astonishing market share in search of 65%.
The reason behind this is none other than its failure to catch the change in user preferences in China, and its failure to yield significant results from its bets on autonomous driving.
As users in China are spending more and more time using “closed off” super-apps, such as WeChat, they can literally do everything there.
This is more so with features like WeChat’s mini-programmes that allow users to use other companies’ apps on WeChat.
The result is that more and more information can now be found only on WeChat instead of through a traditional Internet search engine like Baidu.
As such, companies are more willing to place ads on platforms such as WeChat instead of Baidu.
Besides, Baidu’s investments in autonomous driving were significantly slower than what investors initially anticipated.
This was due to delays in the development and the commercialisation of autonomous driving. Baidu’s bets failed to push its valuation even higher after its peak in 2018.
A time to kill
Sogou currently has around 20% share of the online search market in China. But what’s important is that Tencent is already an existing shareholder with a 39.2% stake in it.
As such, Sogou already partners with Tencent as its exclusive search engine.
After the acquisition, it will be much easier for Tencent to fully integrate Sogou into its ecosystem by potentially opening its “walled” content exclusively for Sogou’s users.
That’s almost like opening a floodgate of information which can drown Baidu.
With Sogou’s share price having dropped by almost 40% since its listing in 2017, it will be a cheap experiment for Tencent to knock out one of its long-time competitors.
There’s no better time to kill off a competitor than when they’re sick and weak.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung owns shares of Tencent Holdings Ltd.