Baidu Announces Offer

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Chinese search engine Baidu BIDU announced Monday that it signed a memorandum of understanding regarding a $1.9 billion offer for 91 Wireless, a subsidiary of Hong Konglisted NetDragon. Clearly, Baidu’s interest lies in the huge mobile traffic on 91 Wireless, which operates two popular mobile app distribution platforms, 91 Assistant and HiMarket, which market research firm iResearch ranks as the top third-party app platforms in China in terms of active users and cumulative app downloads. Baidu’s press release cites that more than 10 billion mobile apps have been downloaded from 91′s platforms.

While rumors of a Baidu acquisition of UCWeb, a leading provider of mobile web browser in China, have circulated for months, we think the acquisition of 91 Wireless is a smarter decision, as industry data have increasingly pointed to apps as a preferred way of accessing content and service on the mobile Internet. It is not expected that  Baidu is still pursuing UCWeb for an acquisition. Many think the acquisition of 91 Wireless gives Baidu coveted ownership of popular app distribution platforms that increasingly attract and direct traffic on the mobile Internet and hold considerable influence over the app downloads and subsequent activities of smartphone users.

In addition to the Baidu mobile map, search app, and default search box on the iPhone and many branded Android handsets, 91 Wireless should help Baidu solidify its status as a traffic hub on the mobile Internet, a goal Baidu has been working hard toward over the past few years. Monetization is probably not a near-term priority, although we think profit-sharing with app developers on downloads and targeted advertising based on user data collected on the app distribution platform are both likely revenue models.

In the meantime, NetDragon is restricted from shopping around for higher bidders regarding the sale of 91 Wireless. Baidu also intends to purchase the remaining equity interests in 91 Wireless from other shareholders (reportedly including Singapore’s sovereign fund Temasek and PCCW chairman Richard Li) before Aug. 14, based on terms and conditions similar to those offered to NetDragon. The 91 Wireless acquisition is the largest deal so far in the Chinese Internet industry in 2013, and the second major one for Baidu following the $370 million acquisition of online video firm PPS in May.

With $5 billion in cash sitting on the balance sheet at the end of March, Baidu has sufficient capital to fund the acquisitions.  According to media reports, 91 Wireless was valued at only $140 million in 2011 at its second round of financing, so the Baidu offer implies an increase of more than 1,200% over two years. It was rumored that Tencent and Alibaba also studied 91 Wireless as an acquisition target. However, Tencent decided to build its own mobile app assistant, while it is unclear if Alibaba lost out in the bidding war or decided against making an offer.

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