Picture: REUTERS/KIM KYUNG-HOON
Picture: REUTERS/KIM KYUNG-HOON

Portland/Hong Kong — Tencent Holdings has offered to buy out and take private search engine Sogou in a $2.1bn deal, adding to a slew of Chinese technology giants seeking to delist from US bourses.

Shares of the social media heavyweight Tencent climbed as much as 4.7% on Tuesday, buoyed by speculation it will more closely integrate Sogou’s artificial intelligence (AI) technology with its own services and devices to gain an edge on rivals such as TikTok owner ByteDance.

Tencent, in which Naspers has a 31.2% stake, has, in past years, come under pressure from ByteDance and other up-and-coming rivals in the emergent short-video arena. Beijing-based Sogou — which name translates to “Search dog” — has long been the default in a slew of Tencent products, including its marquee social app WeChat. It’s also been making a push into AI.

A takeover of Sogou also raises the prospect of a lucrative listing in Hong Kong or Shanghai in the future, on the heels of well-received debuts by Alibaba Group Holding and JD.com. It’s become an increasingly attractive route for tech giants such as Jack Ma’s Ant Group, which is speeding towards what could be the city’s biggest float in years.

Sogou CEO Wang Xiaochuan declared his ambition to list on mainland bourses in 2018,  when regulations permit.

Chinese internet companies are exploring listings closer to home after a proposed US bill threatens to force them to delist from New York by imposing stricter disclosure requirements — a prospect that looks increasingly plausible as the Trump administration amps up action against Beijing on multiple fronts. Online gaming company Changyou.com got taken private this year by Sohu.com, and 58.com is being bought out by a private equity consortium for $8.7bn.

The “market has been anticipating more companies to pursue secondary listing in Hong Kong”, Jefferies analysts led by Thomas Chong wrote. “We [think] there will be more synergies between Sogou and Tencent in search and smart devices in the future.”

Tencent’s return to the search engine business may pose a challenge to China leader Baidu, and help fend off competition from potential market entrants ByteDance and Alibaba. Tencent sold search engine Soso to Sogou in 2013. Its bid to buy the 61% of Sogou it doesn’t yet own at $9 per American depositary share (ADS) will cost more than $2bn, said analysts Vey-Sern Ling and Tiffany Tam.

Tencent is offering $9 in cash for each ADS it doesn’t already hold in Sogou, backed by fellow internet giant Sohu. That’s a 57% premium to the target company’s Friday close. Sogou said in a statement that it is considering the takeover offer, though Tencent already owns about 39.2% of Sogou but controls a majority of voting power.

Sogou, founded in 2005 and merged with Tencent’s Soso search business in 2013, has counted on its partnership with the larger company to help it catch search leader Baidu. Its 2017 initial public offering (IPO) also helped bankroll a longer-term AI effort — about three quarters of its employees are now involved in research and development, according to its website.

Sohu’s shares gained 40% in New York, their most in a decade, while Sogou leapt a record 48% to close the gap with the offer price.

Bloomberg

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