Google hovers as Baidu readies IPO

[HenryTo]

A Google-Baidu combination would produce an internet powerhouse - although I still don't think Google is a good stock to buy here. Has anyone tried the Google Earth program yet? I still have not been able to download the application.
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TheDeal.com
Google hovers as Baidu readies IPO
Monday July 4, 6:00 am ET
By David Shabelman in San Francisco

As Baidu.com Inc. nears an initial public offering in the U.S., the company appears to be drawing a close look from Google Inc., which sources said could have an interest in acquiring the Chinese Internet search leader.

According to published reports in China, Google CEO Eric Schmidt was in Beijing last week meeting with Baidu officials. Mountain View, Calif.-based Google has a 4% stake in the company, and it is unclear whether Schmidt's visit was connected to that investment or other business.

A Google spokeswoman confirmed Schmidt was in China visiting the Internet company's office and that he met with some of its business partners. She declined to say whether he met with Baidu officials or whether the company is interested in acquiring its Chinese rival. In addition to its investment in Baidu, Google also has business relationships with Internet games and wireless content provider Netease.com Inc. of Beijing and instant messaging software maker Tencent Holdings Ltd. of Shenzhen.

Google in 2004 co-led a round of funding in Baidu, along with venture firm Draper Fisher Jurvetson's ePlanet Ventures of Redwood City, Calif., reportedly worth $100 million. Other participants in the round included previous investors Integrity Partners and Peninsula Capital Partners and new investors Bridger Management, China Equity, China Value and Venture TDF.

If Google does have interest in purchasing Baidu, it likely will have to wait until the company's IPO. Baidu is expected to go public on the Nasdaq later this summer in an offering that could raise $200 million and value the company at $800 million to $1 billion. A successful stock debut could force Google to pay top dollar for Baidu, sources said.

David Liu, managing director of technology investment banking with Broadview, a division of Jefferies & Co., said Chinese companies are often reluctant to accept a buyout before they determine their growth prospects.

"If Baidu gets a crazy number from Google, they'll have to consider it," said Liu, cautioning that he has no specific knowledge that Google is weighing a move on Baidu. "But one of the challenges with Chinese companies is that they're growing so rapidly it's a difficult decision to make. For the Chinese clients I've worked with, M&A has been a secondary option because growth prospects are so high and the best is yet to come."

Proceeding with an IPO would provide Baidu with a concrete market valuation, giving the company a better benchmark for negotiating an eventual deal with Google or other suitors. Online payment provider PayPal Inc. used a similar strategy in going public in 2002 before agreeing to a $1.4 billion buyout from eBay Inc. shortly after the offering.

Goldman, Sachs & Co. and Credit Suisse First Boston are lead managers of Baidu's IPO. The company is expected to go public toward the end of July.

Paul Bard, senior analyst with Renaissance Capital's IPOHome.com in Greenwich, Conn., said Baidu could file an IPO registration and kick off its road show at the same time, enabling the company to launch the issue in as little as two weeks. He also said there's little doubt Baidu's IPO will succeed.

"China still remains an attractive breeding ground for emerging growth companies, and investors are willing to invest in new issues with a proven operating model or clear market leadership," Bard said. "Baidu probably will stand out on both these fronts, not to mention the fact that it has already raised a lot of money from Google and Draper Fisher Jurvetson."

Matt Comyns, a partner with BlackInc China, a boutique Internet advisory firm focused on China, said a market cap of $1 billion would value Baidu at roughly 25 times its projected 2005 revenue of $40 million. Market estimates show Baidu and Google together have a 67% share of the search market in China, with Baidu controlling 45%.