Baidu M&A Accelerates With 91Wireless Buy
Everyone is talking about the latest blockbuster acquisition by online search leader Baidu (Nasdaq: BIDU), so I thought I’d get in my own quick thoughts on its purchase of one of China’s leading wireless apps suppliers. In some ways, Baidu’s purchase of 91Wireless for up to $1.9 billion looks like a smart move that will help it diversify beyond its core search business. But in others, the move seems to reflect an M&A strategy lacking focus, since the app business doesn’t really complement any of Baidu’s other core product areas.
Investors certainly liked the deal, bidding up Baidu’s shares by 4 percent after the announcement came out. By comparison, shares of NetDragon (HKEx: 777), the current owner of 91Wireless, tanked by nearly 20 percent in trading in Hong Kong, wiping out around $250 million in company value. The combination of Baidu’s rise and NetDragon’s share decline indicates investors see big value in 91Wireless, China’s third largest app supplier.
According to Baidu’s announcement, it has signed a memorandum of understanding (MOU) to purchase the 57 percent of 91Wireless owned by NetDragon for $1.09 billion. (company announcement; Chinese article) The companies are aiming to sign a final deal by August 14. After that, Baidu aims to purchase 91Wireless’ remaining shares from its other stakeholders, bringing the total deal value to $1.9 billion.
It’s probably worth noting that since the 2 sides have only signed an MOU, it’s still quite possible that they won’t reach a final deal before the August 14 deadline. That possibility could grow following the sharp sell-off of NetDragon’s stock, which indicates that shareholders believe the price for 91Wireless is too cheap.
All of that said, let’s take a closer look at the implications of this deal for Baidu, which has previously said it is looking for major M&A. I’ve often called Baidu a “one-trick pony” due to its strong reliance on search business for most of its revenue. That dependence has made the company particularly vulnerable to cycles in the advertising industry, which is its main source of money.
Baidu’s own organic attempts to develop other businesses have all been largely disappointing, including its shuttering of an e-commerce joint venture last year with Japan’s Rakuten. It has had better success with its its purchase of a controlling stake of online travel agent Qunar for $300 million in 2011. Qunar has risen quickly to challenge sector leaders Ctrip (Nasdaq: CTRP) and eLong (Nasdaq: LONG) through its use of an innovative business model.
Baidu made a similar sized purchase earlier this year when it bought the online video sharing business of PPS for $370 million, aiming to combine the unit with its own iQiyi unit. (previous post) While that deal looked logical, this latest move doesn’t really seem to complement any of Baidu’s existing businesses, leading to my earlier assessment that Baidu’s broader M&A strategy lacks focus.
Baidu founder Robin Li has previously said the mobile Internet will be crucial to his company’s future, so from that perspective this purchase seems to be a move in that direction. Global search leader Google (Nasdaq: GOOG) also operates a big app store to complement its popular Android mobile operating (OS) system. But Baidu doesn’t have its own OS, so its a bit unclear why it would want such an app store.
We’ll have to wait and see what Baidu’s next move is before making any final judgment on this latest purchase, as I do expect we’ll see some more major purchases by the company in the mobile market in the next 12 months. But for now, at least, this latest acquisition may look smart from a financial point of view, but seems to lack a broader strategic focus.
Bottom line: Baidu’s plan to buy 91Wireless looks smart as a stand-alone purchase, but reflects a lack of focus to its broader M&A strategy.
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