Excerpts from a note published by Citigroup analysts Mark Mahaney and Jason Brueschke released yesterday:
Head of Google (GOOG) in China said that Google is open to using M&A in China as a way to grow its talent base, technology and portfolio.
Our reading of GOOG’s M&A history to date and its strategy is that the most likely M&A candidates in China would be small technology/R&D shops or unique localized applications. That said, there are several potential candidates that might offer distinct advantages in terms of increased user bases or expanded Web traffic.
We think Google is likely looking for companies with unique technology skills sets or companies that can help Google localize its offerings for the China market.
If Google were to depart from its practice of making primarily technology-based acquisitions, it is interesting to consider who, among publicly-listed Chinese Internet/Media companies, Google might consider acquiring:
Baidu.com Inc (BIDU): The Obvious Choice. The issues are likely to be: (1) Management resistance – Baidu founder Robin Li is the obvious person to run the China operations were such a deal to happen, but Google has hired two talented people to run its operations already; (2) Government resistance – While it is a generally held view that the Chinese government is reluctant to allow Sina (SINA) to be acquired, it is unclear if the Chinese government feels the same way about Baidu and the Search market. Our view is that a takeover of Baidu would meet significant government resistance; (3) Google needs Baidu more than Baidu needs Google – Baidu is the leader and appears to be pulling away from Google in China. As a result, there are fewer reasons for Baidu to sell, in our view. Nevertheless, Google already owns a small percentage of Baidu, purchased when Baidu was a private company, so a deal is not out of the question. Near-term, we expect Google to choose to compete with Baidu, rather than trying to take control of Baidu.
Sina (SINA): The Best Fit. Sina has tremendous Internet traffic that continues to grow. Google could benefit from this traffic. Moreover, Sina’s search engine has basically failed, meaning Sina is not likely to effectively monetize its traffic on its own via CPC Search anytime during the next several years, in our view. A deal would thus benefit each party significantly, and they could be natural allies similar to AOL and Google in the U.S. However, the Chinese government would likely prohibit Google taking a controlling stake in Sina. As a result, we believe the most likely result would be for Sina and Google to reach an agreement whereby Sina uses Google’s search engine to monetize its traffic in exchange for most of the revenues — perhaps 90%+ of the search revenues. It is possible that a small equity stake by Google – say 9.99%, which would not trigger the Sina poison pill – could cement the deal without being vetoed by Beijing. However, in our view, such an equity stake is not necessary for such a Sina-Google strategic partnership.
51job (JOBS): Leader in Online Classified Job Market. 51job would bring Google access to the dominant player in the online job market in China. While 70% of 51job’s revenues are print based, its online business and traffic is still the strongest in China, in our view. The #2 player, ChinaHR, is already controlled by Monster Worldwide, and hence is not available. 51job investors recently sold a 15% stake to Japan’s Recruit, with the option to take this stake to 40% over the next three years, which could make 51job a less attractive target for Google (unless an accommodation with Recruit could be reached).
Sohu (SOHU): Strong Assets, But Not Likely. Sohu would be an attractive fit for Google, as its seven properties have traffic levels on par with Sina and Baidu. However, Sohu has a strong search effort fully under way, and Sohu has been publicly quoted as saying it believes Google will ultimately fail in China. With a controlling shareholder/founder determined to beat both Baidu and Google, Sohu seems an unlikely seller, in our view. Finally, Sohu likely faces similar government approval issues as Sina would.
Online Gaming Companies: NetEase (NTES) a Possibility, But Not Likely. While NetEase has significant traffic, much of it is youth-focused due to the company’s strength in online gaming. If Google were to acquire a gaming company, NetEase would be the one, in our view. Shanda and, especially, The9 are more pure-gaming plays and thus likely to be less desirable to Google, in our view.
Wireless VAS Players: Tom Online (TOMO). Like NetEase in Gaming, only one player makes any sense in the WVAS sector: Tom Online. The largest player in this space, Tom excels at monetizing traffic via mobile phones. However, Tom actually is weak in terms of traffic compared to the Portals, and needs to grow its own traffic and brand ahead of full-scale 3G launch in China, in our estimation. Such a deal would add little to meet Google’s most pressing needs, in our view.
