Sohu And The Privatization Of Sohu

On the evening of July 27, Sogou announced that the company's board of directors had received Tencent's privatization offer, and Tencent planned to purchase all the shares it had not held at the price of $9 per share. Once the transaction is completed, Sogou will become an indirect wholly-owned subsidiary of Tencent, and Sogou will also be delisted from the New York Stock Exchange.

The 21st century economic report noted that in the proposed takeover offer signed by Liu Zhiping, Tencent's president, Tencent said, "we believe that our proposal provides an attractive opportunity for Sogou's shareholders.". This is because the purchase price of US $9 / share is about 56.5% higher than the Sogou closing price on the trading day before the proposal was issued, and 84.9% higher than the weighted average price of the stock price of the previous 30 trading days. Moreover, Tencent will complete the transaction in cash.

Sogou said the company's board of directors will be composed of a special committee of independent directors to consider the acquisition proposal. Sogou CEO Wang Xiaochuan also responded to Tencent's takeover offer, saying that he was grateful for Tencent's recognition of Sogou's value, technological capability and product innovation capability. Next, we will seriously discuss and measure the relevant issues, so that Sogou can continue to create greater value for users.

But in fact, Tencent's offer proposal has disclosed that Zhang Chaoyang, who holds 6.4% of Sogou's shares and 0.9% of voting rights, has agreed to the transaction, and Zhang Chaoyang is also the actual controller of Sohu, the controlling shareholder of Sogou.

After obtaining Zhang Chaoyang's support, Tencent's acquisition of Sogou is basically certain. On the day of the announcement, Sogou's share price rose 48% to close at $8.51/share, while Sohu's share price also rose nearly 40% to $15.55/share.

In this transaction, Sogou, Sohu and Tencent are the three most critical subjects. In September 2013, the helmsmen of the three companies, Wang Xiaochuan, Zhang Chaoyang and Ma Huateng, gathered at Sohu building in Beijing, and established a stable cooperative relationship among them. However, seven years later, this relationship was broken by a statement. Sohu chose to withdraw and Sogou was completely incorporated by Tencent.

Some Internet industry analysts said that the reason for this change is "potential". Seven years ago, the mobile Internet was in the ascendant, and it was the general trend for the three parties to attack in groups. The current situation, whether in Sohu or Tencent, is also forced by the situation.

The turning point of Sogou

Sogou officially landed in the US stock market on November 9, 2017. At the listing site, Wang Xiaochuan said that looking back on Sogou's growth history, it was 14 years of both hardship and joy. When giving thanks, Wang Xiaochuan first of all thanks Zhang Chaoyang. He said that Sogou can always insist on doing search without Zhang Chaoyang's support.

In 2003, Wang Xiaochuan, who graduated from Tsinghua University, formally joined Sohu. Before that, Wang Xiaochuan had worked part-time in Sohu for three years, so when he joined Sohu, he was already an "old employee" of Sohu. This also made him directly cross the stage of adapting to the company after graduation. In the first year of joining, Wang Xiaochuan, as the senior manager of Sohu technology, began to set up Sohu R & D center and began to develop search engine.

In August 2004, Sogou search was officially launched; in June 2006, Sogou input method was released. With the success of these two products, the scale of Sogou team is growing, and Wang Xiaochuan's position in Sohu is also improving. In 2009, Wang Xiaochuan was appointed CTO of Sohu company.

In the development of Sogou, 2010 is an important turning point. Since 2010, Sogou has been separated from Sohu and operated independently. Wang Xiaochuan has also become the CEO of Sogou company, which means Sogou has transformed from a business department of Sohu into a company.

Subsequently, Sogou also took Alibaba's investment, but what really determined its development in the past decade was Tencent's strategic shareholding in 2013. In September 2013, Tencent injected $448 million into Sogou, and merged its Tencent search business and other related assets into Sogou. After the transaction, Tencent acquired 36.5% of Sogou's diluted shares.

This is an important investment in the process of Tencent's implementation of open ecology. Like the e-commerce business to jd.com, the search business is entrusted to Sogou. In the subsequent development of Sogou, Tencent also gave sufficient support, including the exclusive content resources of wechat public account.

For the reporter, the core value of the search engine is to constantly enhance the competitiveness of the search engine.

The annual report of Tencent is also an important resource disclosure. It is disclosed that among Tencent's many products, Sogou search is the default general search engine. In 2019, about 35% of the total search traffic of Sogou is contributed by Tencent products.

Sohu's house

According to the stock rights disclosed in Sogou's 2019 annual report, Tencent holds 39.2% of the shares, with 52.3% of the voting rights; Sohu holds 33.8% of the shares with 44.1% of the voting rights. Wang Xiaochuan holds 12.5% of the voting rights of directors, and other directors hold more than 1.5% of the voting rights.

From the perspective of shareholders and shareholders, Tencent should vote. However, when making strategic investment in Sogou, Tencent and Sohu signed a voting agreement in order to uphold its open strategy of "holding shares but not holding shares". Based on the agreement, Sohu is still the controlling shareholder of Sogou, although the shares and voting rights of Sohu are less than those of Tencent.

Sogou's success is also something to be proud of, especially in the past 10 years, Sohu as a whole has been in a downward state, and Sogou is one of the few high growth businesses.

When Sogou went public, Zhang Chaoyang also said that Sohu is the major shareholder of Sogou. Sogou's listing and its good performance will be directly reflected in Sohu's financial report, especially its profit, which is good news for Sohu.

According to Sohu's annual report, Sohu group achieved revenue of 1.85 billion US dollars in 2019, of which the revenue of search and search related advertising business was 1.07 billion US dollars, accounting for more than 57%. Not only that, Sogou's profits have been making up for the losses brought about by other businesses, but this situation will begin to change in 2020.

According to the financial report of the first quarter of 2020, Sogou's revenue was $257.3 million, up 2% year-on-year; the net loss attributable to Sogou was $31.1 million, and the net loss under non international accounting standards was $31.1 million.

In the first quarter of this year, Sogou began to bring negative growth to Sohu. According to Sohu's financial report, Sohu's first quarter revenue was 436 million US dollars, an increase of 6% year-on-year. Under the non-U.S. general accounting standards, Sohu's net loss was $18 million, while after deducting the performance of Sogou, Sohu's net loss was $8 million.

In an interview with the 21st century economic reporter, Zhang Chaoyang has always stressed that the first quarter of this year is a "very critical" quarter, because it shows that Sohu has returned to safety from a very dangerous loss state.

The index that Zhang Chaoyang attaches great importance to is the profitability of Sohu group. At that time, Sohu's net profit in the fourth quarter of 2019 was mainly realized by Sohu, which was not based on the US accounting standard of $700000.

As of the beginning of this year, Sohu's main revenue sources are Sohu group, Changyou and Sogou. In April, Changyou was privatized by Sohu and delisted from US stocks. Zhang Chaoyang told the 21st century economic reporter that there are many reasons for Changyou's privatization, including the undervalued market value and Sohu's hope to bring Changyou back to the group to help realize a virtuous financial cycle for the whole group.

In 2016, Zhang Chaoyang once said that Sohu would return to the center of the Internet stage within three years, but when the three-year agreement expired, Sohu did not fulfill its promise. Zhang Sohu, especially Sohu, is in the state of retirement this year, and I feel that I am not in the state of retirement

And Zhang Chaoyang's target battlefield has been locked in Sohu group. Therefore, this can also answer why Sohu is willing to sell Sogou to Tencent, because according to the current development of Sogou, it may become a financial "burden" for Sohu group this year.

On the contrary, through the sale of Sogou's equity, it is estimated that Sohu can obtain about $1.2 billion in cash, which will provide sufficient "ammunition" for its future development.

Tencent's success

According to Tencent's current shareholding, it needs about $2.1 billion in cash to acquire Sohu. As of the end of the first quarter of this year, Tencent's total cash held was about 220.5 billion yuan, so the source of funds for the purchase of Sogou is not a problem.

Why did Tencent start to make a loss? Some analysts told reporters that if Sogou is only regarded as an independent product company, then from its current situation, its value is indeed in the decline period. But for Tencent, if Sogou is regarded as a supplement to the whole Tencent ecology, Sogou will also release greater value.

For search business, Tencent is regaining interest recently. At the end of last year, the wechat team officially upgraded wechat search to "wechat search". The official positioning of "wechat search" in the wechat ecosystem is to provide more possibilities for users and merchants to connect with massive wechat content through search.

For wechat, the search object of "search a search" is no longer limited to wechat ecological content, such as friends circle, public number, etc., it hopes that "search a" can reach more services, scenes and more external information. Previously, wechat search has launched a "service search" function. For example, users search for "express" keywords, and the results will directly show the access express service number.

Sogou is already a provider of wechat's "search and search" external Internet content. From the perspective of cooperation alone, it seems that both sides can have a good agreement. However, some analysts believe that the purpose of Tencent's acquisition of Sogou is not the content, because the content is already there, but the search technology behind Sogou. After all, it was the two companies before, and there was still a gap in the technology integration, but after the acquisition, it can be fully absorbed.

According to Aurora big data, from the penetration rate of search app, baidu is still the search engine with the highest penetration rate, which is far higher than other products. Other engines with a certain volume are Sogou and Alibaba's quark search. In addition, it is worth noting that although there is a certain gap between the penetration rate of headline search and the above-mentioned products, the growth rate can not be ignored.

At present, the competition of embedded search engine in super app seems to be becoming the main battlefield of search competition. From the perspective of Baidu, it is trying to transfer users' search habits to Baidu app. A person familiar with the matter disclosed to reporters that Baidu app accounts for about 60% of Baidu's total search traffic. For Baidu, the next thing to do is to expand more content ecology and improve the richness of products on the basis of search.

On the contrary, wechat is the opposite of today's headlines. They hope to further improve the efficiency of information distribution in their original content ecology, and enable users to access more information in their own apps. Therefore, Tencent further launched its search business, which is not only the only way to improve the product ecology, but also an important defensive strategy to counter the future competition risk.

In addition, it is worth noting that Tencent's investment strategy seems to have changed in the past six months. Internet industry analyst Pei Pei pointed out in his analysis article that Tencent has a clear change trend since 2019, that is, from "informal empire" to "formal Empire".

According to Mr. Pei, Alibaba's efforts to establish an "official Empire" through mergers and acquisitions began in 2016, while Tencent started in 2019. For example, Tencent acquired supercell in the fourth quarter of 2019; increased its holdings of Huya to the consolidated financial statements in April this year; changed the management of Yuewen in the second quarter; and now it proposes to purchase Sogou.

This may also be the strategic adjustment Tencent began to make when the Internet industry developed to a certain period. "When an Internet giant should rely on investment and when to rely on mergers and acquisitions can not be generalized. Even if it turns to M & A, Tencent's organizational structure is obviously looser than its competitors, and its business groups and divisions enjoy a lot of independent autonomy. " Pei Pei said. (Editor: Zhang Xing)