Archive for August, 2005

Baidu: “We’ve Seen This Movie Before”

Posted in China, Deals, Digital Media, Investment Banking, Media, News with tags , , , , , , , , , , , , , , , , , on August 11, 2005 by Dave Liu

I was interviewed for the following article which was written by Steve Rosenbush and published by Business Week on August 11, 2005.

Investors hope it’ll be another Google, says China tech banking expert David Liu. But he warns that it’s “hard to pick winners in tech” The initial public offering of Baidu (BIDU ), the Chinese Internet search company, shattered records on Aug. 4. It was the most successful Nasdaq IPO in five years, rising from $27 to $154. While the stock price has settled back at $91, the company has recast the perception of the Chinese Internet market. Valuations of Internet companies, and search companies in particular, are on the rise.

Now, big players from the U.S. are pouring into the Chinese market. Google (GOOG ) has a stake in Baidu. Yahoo! (YHOO ) is said to be in talks with e-commerce site Alibaba, eBay (EBAY ) has acquired Eachnet, and MSN has its own operations in China (see BW Online, 8/11/05, “There’s More Where Baidu Came From”).

David Liu, managing director of China tech banking at Jefferies & Co., expects valuations to keep rising in the wake of the Baidu IPO. He spoke about the Chinese tech market with BusinessWeek Online Senior Writer Steve Rosenbush. Here are edited excerpts of their conversation.

Q: How would you characterize Baidu’s valuation?

A: By any conventional standards, the valuation looks very high. Its valuation is higher than Yahoo, Google, or eBay. To justify this valuation, Baidu needs to grow faster than Google.

Q: Why did Baidu’s value reach its current level?

A: The valuation of Baidu was driven by a “perfect storm” of investment conditions. There haven’t been that many IPOs, and the market is starved for good growth ideas.

Lots of investors have been kicking themselves because they didn’t buy Google when it was in the 80s. It’s 300 now. We’re also seeing rapid growth of the China market. It’s a very large opportunity. It’s the second largest Internet market in the world, and over the next two years, pundits believe, it will become the largest Internet market in the world.

The valuation of Baidu was also driven by the rapid growth of online advertising and revenues related to search. And the nice thing about Baidu is we’ve seen this movie before — in the U.S. Everyone believes the same movie is going to play out in China and that Baidu will do as well as Google.

Q: But is the current valuation justified?

A: The company hasn’t disclosed forward-looking revenue numbers. The analysts who worked on the deal are in a quiet period, and we won’t see anything from them until 40 days after the IPO, or early September. Those reports will show their view on Baidu’s projections. Once the numbers come out, we can figure out whether the company’s projected growth justifies its current valuation.

Q: How will the Baidu valuation alter the outlook for M&A and IPOs in China?

A: There’s no doubt the Baidu IPO will affect companies that are in a related space, like Alibaba. Any Chinese search company today is going to look at the Baidu situation and start thinking more about launching an IPO than pursuing an M&A.

Baidu will have an effect on the broader market, too. There are only 30 China-based tech companies on the Nasdaq. That’s a very small sample, so every single deal has a meaningful impact on expectations. If you’re a China-based tech company looking to sell or go public, an event of this magnitude heavily skews that sample and what you think the value of your company is. In my opinion, the Baidu IPO pushes valuations beyond the point where many M&A deals can get done.

Baidu clearly affects companies with one degree of separation — those that are rivals of Baidu. And it affects the valuation of Internet companies, or companies with two degrees of separation. They will argue that they make their money by monetizing traffic, just like Baidu.

Tech companies, which have three degrees of separation, will argue that they’re tech market leaders, just like Baidu and deserve a similar valuation. And companies with a fourth degree of separation, which operate beyond the tech market, will argue that they deserve a valuation comparable to Baidu, too. But I think these arguments lose credibility unless the company is a search company or an Internet company.

Q: Can you be more specific about how Baidu will change the outlook for M&A and IPOs in China?

A: Baidu will have the biggest impact on search companies like Sina and Zhongsou, which compete directly with Baidu. It also may have an effect on companies like Alibaba, the b2b site. While Alibaba may be in talks with Yahoo, it’s unlikely to sell out entirely. It may sell a piece to Yahoo, then go public, just as job site eLong sold a piece to Barry Diller’s IAC/Interactive before it went public. [eLong was acquired by Interactive and is now part of spinoff Expedia.]

We’ll see more two track deals like this. M&A is difficult in any market growing this fast because the seller thinks it’s going to keep growing like crazy, and the buyer thinks expectations are too high.

Other companies on the cusp of M&A or IPO include China HR, the job site. Rival job site 51job (JOBS) went public last year. It was the second-best performing IPO on the Nasdaq. Another job site, Zhaopim, may also be close to IPO or deal. The same is true for Soufum, the real estate site. But once you get beyond search and Internet sectors, the influence of the Baidu IPO really starts to wane.

Q: Is there a danger that an M&A/IPO bubble is forming in the China market?

A: Valuations are based on a company’s future growth. If these companies perform well, the valuations will be justified. If they don’t, valuations will come down. That’s why quarterly performance is so important. These kinds of businesses are so new in China.

But there will be a new Google, a new Yahoo, and a new Microsoft that comes out of China. And these market leaders will justify their valuations. But these companies are relatively small, and it’s hard to pick which ones will be winners. That’s why investors get paid so much money. It’s particularly hard to pick winners in tech, which tends to be a winner take all market.

Q: Will Baidu be a winner?

A: It has the lead right now, but someone else could come along. Google wasn’t the first search company in the U.S., or even the second or the third. And most of those early leaders aren’t around today.

There’s More Where Baidu Came From

Posted in China, Deals, Digital Media, Investment Banking, Media, News with tags , , , , , , , , , , , , on August 11, 2005 by Dave Liu

I was interviewed for the following article which was written by Brian Bremner and Justin Hibbard and published by Business Week on August 11, 2005.

The search engine’s runaway stock may spur Chinese Net IPOs — and rein in M&A as companies’ ideas of their own valuation soar How do you say feeding frenzy in Chinese? The moon shot of an initial public offering by Chinese Internet search engine Baidu.com (BIDU ) — whose $27-a-share launch on Aug. 4 jumped fivefold, to $154, before settling back to around $90 — shattered a five-year record for the best debut on the Nasdaq. It tapped into a deep investor hunger for the next Google (GOOG ) — which has seen its shares triple in the past year — and a desire to profit from the Internet in China, where some 100 million people now go online.

So will Baidu’s success unleash a flood of China Net IPOs? There’s good reason for excitement. Broadband subscribers in China last year more than doubled, to 43 million, and Beijing technology research firm BDA China is forecasting the online advertising market, worth $208 million in 2004, will expand to nearly $1 billion by 2009.

IPO INSPIRATION

Although the stampede into Baidu is partly based on the search engine’s similarity to Google, it also reflects optimism about that potential growth. That’s why many analysts are bullish on Chinese Internet companies. “We will see an expansion of the valuations. Baidu helped that,” says Piper Jaffray analyst Safa Rashtchy.

Indeed, some Chinese tech companies that have been considering a flotation might now jump in. “Given the success of Baidu, I’m sure some other Google look-alikes will be inspired to [do an] IPO,” says Khiem Do, head of Asian equities at Baring Asset Management.

At the same time, Baidu’s offering could put a damper on a wave of mergers and acquisitions among Chinese Net companies that had been picking up. Yahoo! last year paid $120 million for control of Beijing 3721 Technology Co., and it now appears to be close to a $1 billion deal to buy a one-third stake in Alibaba.com, an online marketplace for small and midsize Chinese companies.

“CROWD PSYCHOLOGY”

And in February online game pioneer Shanda Interactive Entertainment bought a 19% stake in portal Sina.com. After Baidu’s performance, however, Chinese Net entrepreneurs may believe their companies are worth more than potential acquirers are willing to pay. “The Baidu IPO pushes valuations beyond the point where many M&A deals can get done,” says David Liu, a managing director at investment bank Jefferies & Co. (see BW Online, 8/11/05, “Baidu: “We’ve Seen This Movie Before””).

All this doesn’t mean Baidu truly warrants its own sky-high valuation. Baidu, co-founded five years ago by former Infoseek engineer Robin Yanhong Li, is the mainland’s No.1 search engine, with 45% of the market. But the company earned just $1.45 million on $14 million in sales in 2004. At $90 per share, Baidu’s market capitalization is nearly $3 billion — which values it at more than 1,800 times 12-month trailing earnings, compared with price-earnings ratios of 70 or so for Google and Yahoo.

And Baidu faces intense competition. Its rivals include well-heeled U.S. search providers such as Google (which owns 2.6% of Baidu), smaller Chinese search sites, e-commerce players like Alibaba, and portals Netease, Sina, and Sohu. “We are in the realm of crowd psychology,” says Duncan Clark, BDA’s managing director.

WHO GETS BITTEN?

Investors might also note that the record of Chinese Net stocks has been mixed. Of the 10 Chinese tech companies that went public last year, 7 are trading below their offering price. Online 51job Inc., which went public at $14 in September, 2004, zoomed to $55 before falling to its current $13.

The one exception: Shanda Interactive, the best-performing stock on the Nasdaq last year. It went public in May, 2004, at $11 and now trades at $37.50, up 241%. Although Baidu’s IPO boosted some of the laggards, they quickly fell back to where they were before the IPO. In a feeding frenzy, it seems, someone always gets bitten.