Sohu: China's biggest little net firm
I had to smile this morning when I read the latest reports on Sohu (Nasdaq: SOHU), one of China's oldest web firms, which I'm officially christening as "China's biggest little internet company" following word that it plans to make an IPO for its Sogou search engine. If readers note some sarcasm in my tone, it's certainly there. But at the same time, I do have a certain level of fascination with this company, which seems determined to spin off as many of its units as possible into separate publicly listed companies.
The latest news reports caught me a little by surprise, as this is the first time I've heard that Sohu founder Charles Zhang wants to spin off Sogou, which is finally starting to gain some traction against dominant search engine Baidu (Nasdaq: BIDU) after nearly a decade in business. In releasing its latest results earlier this week, Sohu said that Sogou's revenue doubled to US$37 million in the second quarter, and was set to reach about US$40 million in the current quarter. Sogou now controls between 5-7 per cent of China's search market, making it the third biggest player after Baidu and a fast-climbing new service launched this summer by Qihoo 360 (NYSE: QIHU).
Perhaps Sohu is leaking this latest news about a potential Sogou IPO into the market to test investor reaction after the relatively positive earnings report. Reports of the IPO plan, which cite a knowledgeable source, only say that Sogou could make an offering as soon as next year, and that the company is currently looking for a strategic investor to purchase up to 15 per cent of its shares. (Chinese article)
Readers may recall that e-commerce leader Alibaba previously owned 10 per cent of Sogou, but sold that stake last year. So this search for a new strategic investor looks less like an attempt to raise cash and more aimed at bringing in a new Internet partner to help Sogou develop its business.
But to return to my original point, I find Zhang's latest IPO plan somewhat amusing, as it would be just the latest offering on a fast growing list for such a small company. Sohu has already spun off its online gaming arm, Changyou (Nasdaq: CYOU), though it remains the company's controlling stakeholder. Sohu has also repeatedly leaked news of its plan to seek a separate listing for its online video business. So this new Sogou IPO plan, if it happens, could give Sohu four publicly listed companies if you also include the parent company.
That seems just a bit excessive for a parent company that now earns about US$1 billion in annual revenue and has a market capitalization of less than US$2 billion. China's top two publicly listed web companies, Tencent (0700.HK) and Baidu (Nadaq: BIDU) have market caps that are more than 10 times larger and yet seem content to maintain a single listing for all of their business. The only other company with a similar fondness for spinning off its units is Shanda Group, though even Shanda took the important step of privatizing the parent company earlier this year in a bid to avoid investor fatigue.
I suspect that Zhang has a fondness for playing money games, which is why he's so interested in spinning off so many of his units into separate companies. If he's not careful, he could soon become the father of a new family of underperforming stocks, as investors quickly lose interest in shares of companies that are all relatively minor players in their spaces.
Bottom line: Sohu's latest plan to spin off and publicly list its search business seems misguided, and could create investor fatigue as the company lists too many of its units.