BUYOUTS: Baidu’s De-Listing Threat — Real or Tactical Move?

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Bottom line: A threat to privatize Baidu by chairman Robin Li is probably the result of frustration at recent declines in the company’s stock and is unlikely to result in a serious buy-out bid.

Frustrated Robin Li threatens Baidu privatization

The biggest privatization threat to date by a US-listed Chinese company has just come from online search leader Baidu (Nasdaq: BIDU), whose chairman Robin Li is joining a growing chorus of executives who say their shares are underappreciated by Wall Street investors. In this case it’s easy to see why Li is unhappy, since Baidu’s stock has lost a quarter of its value since July, when the company reported a spending binge on new businesses had sapped its profits.

Baidu’s shares were actually down by an even greater 30 percent at the start of this week, but surged 6 percent in the latest session amid a broader rally for Chinese Internet stocks. It should come as no surprise that the US surge was sparked by a rally earlier in the day on China’s domestic stock markets, which is where Baidu and many of its other US-listed Internet peers say they would like to re-list.

Baidu’s Li made his remarks in an interview with Chinese media, saying US investors need to understand that he’s sacrificing profits now to build a stronger, more diversified company for the future. (Chinese article) Baidu has long been a one-trick pony, deriving the vast majority of its revenue from its core online search business. That’s not to say Li hasn’t tried to develop other areas, but nearly all those efforts have failed until recently.

Then Baidu discovered a new tactic, and largely abandoned its old strategy of trying to build new businesses organically and instead began to chase acquisitions. One of its first major moves was its purchase of online travel agent Qunar (Nasdaq: QUNR), and now it’s using a similar approach to build up its iQiyi online video and Nuomi group buying units.

Planning for the Future

My own view is that Li is somewhat correct about needing to think about the future, especially as Baidu comes under threat from the 2-year-old Haosou search service rolled out by rival Qihoo (NYSE: QIHU). But his complaint is commonly heard from many US-listed companies, which say US investors are often too focused on profits and are intolerant of firms that sacrifice profits in the present for investment in the future.

That issue wasn’t a problem for Li during most of Baidu’s life as a publicly traded company, since its profits posted healthy double-digit growth continuously since its IPO a decade ago. But China’s Internet landscape is far more crowded now than it was when Baidu first went public, and Li is correct in thinking that he needs to create a more diversified company. Of course, it’s also worth noting he has yet to produce any profitable new businesses, despite massive spending on many of his non-search initiatives.

If Li really went ahead with his threat, he would become just the latest of about 3 dozen US-listed Chinese companies to announce privatization plans this year. All harbor the same complaint about unappreciative US investors, though only a handful have actually managed to de-list so far. Most are also hoping to eventually re-list in China, where investors tend to look less at fundamentals like profits and trade more on momentum.

All that brings us back to Li’s new threat, and whether he’s really serious or has some other motive. I suspect his remarks are largely the result of frustration, and aren’t the sign of an imminent privatization bid. Baidu would be extremely difficult to privatize due to its huge market value of more than $50 billion. By comparison, PC giant Dell was worth about half that amount at the time of its equally difficult privatization 2 years ago. At the end of the day I seriously doubt that Li will attempt a buy-out bid for his company, though perhaps his threats could provide some short-term support for Baidu’s stock.

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