Qihoo Milks Rally With $600 Mln Bond Offer
Software security specialist Qihoo 360 (NYSE: QIHU) is pouncing on a recent rally in its shares to announce a massive new bond offering, becoming the latest in a select group of top Chinese tech firms to raise big new funds as investor enthusiasm returns to the sector. Following its announcement of upbeat earnings earlier this week, Qihoo has followed with word of the plan to offer senior 5-year notes worth $600 million. To put things in perspective, that amount is equal to more than 6 percent of the company’s market value, which is already quite inflated after Qihoo’s shares have nearly quadrupled over the last year.
As an independent observer who doesn’t own Qihoo stock, I have to applaud the company for the timing of its move, which takes advantage of the huge recent rally in its shares. I still have reservations about Qihoo due to its sometimes questionable business practices, which often result in lawsuits against the company. But its recent surge into the online search business is quickly mounting a major new challenge to industry leader Baidu (Nasdaq: BIDU), and I suspect we will see some major contributions from this new segment to Qihoo’s top and bottom lines in the next year.
More broadly speaking, this latest capital raising seems to show that investors are embracing a select group of China’s largest tech firms, focusing on profitable companies that have shown strong growth potential. Names like Baidu, Tencent (HKEx: 700), Alibaba and Xiaomi have all raised $1 billion or more in new capital over the last year through bond issues and private placements. This latest move by Qihoo shows such deals could continue to come, and I wouldn’t be surprised to see a few similar large bond offers or private placements from some other big Internet names in the next few months.
Qihoo said it will issue $550 million in 5-year convertible bonds and give buyers the right to purchase another $50 million worth, bringing the total amount of money raised to as much as $600 million. (company announcement) Qihoo shares took a break from their recent rally after the news came out, dipping 4 percent in after market trading. Still, at their current price of $76 per American Depositary Share (ADS), they are still multiples ahead of the $20 level where they traded just a year ago.
In its announcement Qihoo gave the generic explanation that it will use the new funds for general corporate purposes. But I expect the company also hopes to use some or all of the money to purchase Sogou, the online search business owned by web portal Sohu (Nasdaq: SOHU). Qihoo has been seeking such a tie-up for months now, and media have reported several times that a deal was imminent. But no word of a final agreement has ever come, and I suspect tough bargaining by Sohu chief Charles Zhang is the main obstacle.
Qihoo would desperately like to acquire Sogou, as such a purchase would greatly help its drive to challenge Baidu’s years-long dominance of the lucrative online search space. Qihoo’s own So.com search engine now controls nearly 20 percent of China’s market just a year after its launch. Sogou, which is much older, has also seen recent positive momentum and now controls about 10 percent. Thus a combination of the 2 would give Qihoo nearly a third of the market, or nearly half the size of Baidu’s share.
This latest capital raising could indicate that a Sogou deal may finally be near, though I’ve made such a prediction too many times before to make the same mistake again. Still, I do expect that we’ll see some kind of Sogou-Qihoo tie-up eventually, and that we’ll also see some other fast-growing Internet firms make more bond or equity offers of $200 million or more in the months ahead.
Bottom line: Qihoo’s new mega-bond offer could signal a tie-up with Sogou is near, and foreshadows more similar capital raising by China tech firms in the months ahead.
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