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Tencent teams up with Sohu to vie for No 2 spot

Surprise deal sees HK-listed mainland internet giant paying US$448m for 36.5pc stake in rival search engine Sogou that will merge with Soso

PUBLISHED : Tuesday, 17 September, 2013, 12:00am
UPDATED : Tuesday, 17 September, 2013, 3:38am

Mainland internet giant Tencent has invested US$448 million in cash to take a 36.5 per cent stake in Sohu.com's Sogou search service, and will merge its Soso search-related businesses into Sogou to compete for second position in the local search market.

Tencent and Sohu yesterday said that Tencent could increase the stake to 40 per cent in the near future, while Sohu would remain Sogou's controlling shareholder.

They said Sogou would continue to operate independently as a subsidiary of Sohu and that Sohu's chairman and chief executive Charles Zhang would remain Sogou's chairman.

Zhang said the partnership would "immediately" expand Sogou's market presence and "significantly" elevate its position in the personal computer and mobile search markets.

The news surprised many as the market had been expecting either Qihoo 360 Technology or the country's largest search engine company, Baidu, to buy Sogou to consolidate their market lead. In July, Qihoo said it was in talks to buy Sogou.

Sogou is the mainland's third-largest search engine in terms of users and Soso is its fourth-largest. Sogou accounted for 5.5 per cent of search-engine queries on the mainland in the first quarter of the year. Baidu had 82 per cent and Qihoo 360 followed with 9 per cent, according to data compiled by Bloomberg.

Liu Xingliang, the chairman of Hongmai Software, a Beijing-based internet data analysis firm, said the deal announced yesterday was a case of strategic co-operation for both sides, formerly rivals with search engines and input methods of their own.

"Tencent and Sohu are teaming up to face mutual enemies," Liu said.

He said Baidu would remain the top firm in the mainland search market but Qihoo would be challenged by the combination of Sogou and Soso.

Li Zhi, the chief analyst at market research firm Analysys International, said Baidu might benefit from the alliance.

"The co-operation poses a threat to Qihoo, but Baidu may like the situation," Li said.

If Qihoo had bought Sogou, then Baidu would have to face quite a strong rival, which would have been more difficult than dealing with two relatively smaller competitors, he said.

Tencent and Sohu said Sogou's leading products, including its input method, Sogou Pinyin, and Sogou Search, would have direct access to the vast user base of Tencent's online and mobile social communities.

Tencent went public in 2004. Before yesterday's announcement its shares rose 2.5 per cent to HK$421.20, lifting its market value to HK$782.8 billion (US$101 billion). That made it the first mainland internet firm to hit the US$100 billion level and one of seven Hong Kong-listed companies in the US$100 billion club.