Sohu Shakes Up Qihoo, Chinese Internet Stocks

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Hong Kong-listed Tencent Holdings Ltd. announced Monday morning that the company has invested $448 million in privately held Sogou Inc. and merged its search business with Sogou’s. Tencent now holds 36.5% of Sogou, which Tencent may increase to around 40% “in the near future.” Inc. (NASDAQ: SOHU) is the majority owner of Sogou.

Tencent is Asia’s largest Internet company, and the addition of Sogou’s search engine could be a threat to Baidu Inc. (NASDAQ: BIDU), the dominant search engine in China. Another U.S. traded company, Qihoo 360 Technology Co. (NASDAQ: QIHU), is another player in China’s search market, and this firm has been the recent darling on the Chinese Internet scene. Shares of Qihoo have jumped nearly 200% since the beginning of the year.

Baidu owns a share of the search market in China that is even larger than Google Inc.’s (NASDAQ: GOOG) share of the U.S. search market. At the end of the second quarter, Baidu claimed 82% of China’s search market, with Qihoo a distant second with 9%. Sogou claims 5.5% and Google only 3%.

According to today’s announcement, Sogou will gain access to Tencent’s massive user base of desktop and mobile users. Sohu’s chairman and CEO said:

This partnership will immediately expand Sogou’s market presence and significantly elevate its position in the highly competitive PC search market, and even more so in the rapidly evolving mobile search market. Sogou remains a key strategic asset of the Sohu Group, generating synergies with our other businesses and creating significant value for Sohu shareholders.

This announcement is taking some of the wind out of Qihoo’s sails. Shares are down about 6.5% in premarket trading, at $81.60 in a 52-week range of $20.01 to $94.90.

Sohu’s shares are up more than 10% at $71.40, above the top of the stock’s current 52-week range of $34.84 to $70.63.

Baidu’s shares are the least affected so far, down about 0.6% at $141.75 in a 52-week range of $82.98 to $148.25.

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