This week, tech and financial blogs were buzzing with the purported Baidu-Facebook deal, announced by Chinese web portal Sohu.com (SOHU: Charts, News, Offers). The positive news elevated shares of Baidu (BIDU: Charts, News, Offers), which have already been on a two-year winning streak, to new all-time highs, closing at over $140 a share. Rumors had long been brewing regarding the deal, ever since Baidu CEO Robin Li and Facebook CEO Mark Zuckerberg were spotted holding meetings both in Beijing, China and Palo Alto, California earlier this year. This deal would be a goldmine for both companies – for Baidu, which would gain the most popular social networking brand in the world to challenge Chinese social networking giant Tencent, and Facebook, which would finally gain access to the Chinese market, from which it was effectively banned since 2009 along with micro-blogging site Twitter. China currently has the world’s largest Internet user base, with 450 million users and rising, but it is currently sealed behind the “Great Firewall of China,” the tightly controlled government firewall which blocks access to many foreign websites that it labels as inappropriate and disruptive to social order. Even with Baidu’s backing, Facebook has its work cut out for it, as the Chinese government often places heavy restrictions on American companies operating in the country.
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Despite the media frenzy surrounding the deal, both Baidu and Facebook have remained curiously ambiguous about the deal, neither confirming nor denying the rumors. Facebook spokesperson Debbie Frost has responded, “We are currently studying and learning about China, as part of evaluating any possible approaches that could benefit our users, developers and advertisers.” Baidu has flat out refused to comment on the deal. However, Facebook’s actions speak louder than words – in February the company announced that it had opened its third office in Asia, in Hong Kong – where many foreign companies such as Google (GOOG: Charts, News, Offers) enjoy a degree of autonomy while maintaining business connections to the mainland. News of an upcoming Baidu-Facebook social networking juggernaut landing in China was enough to sink shares of search rival Sina.com (SINA: Charts, News, Offers).
The new Baidu-Facebook website would be a stand-alone social networking site, not directly linked to the international Facebook network. This would appease government officials, whom banned Facebook and Twitter, yet allowed their own social networking sites, such as Baidu Space, to stay operational. Building an exclusively Chinese Facebook would also lay the groundwork to one day connect to the global Facebook network, should the Chinese government loosen its firewall restrictions, a real possibility considering Chinese political and cultural modernization and economic growth. Baidu could also put Facebook’s social networking knowledge to use by renovating its aging Baidu Space site, which resembles Google’s Blogger service. Baidu is currently mimicking Google’s strategy, by placing protective moats – cloud computing and mobile software – around its primary revenue generating castle of Internet search and advertising. So far, this strategy has worked in the company’s favor, and it boasts some of the highest operating margins in the industry, at over 50%, in contrast to Google’s 35%. Consider that Baidu has less than a third of Google’s market capitalization, with a primary customer base in the most populous nation and the second largest economy in the world, and it’s easy to see why analysts are quick to gush over this Wall Street darling.
Looking forward, the company has both catalysts and speed bumps on the horizon. Most importantly, a rising middle class throughout China will increase Internet usage exponentially, and with 75% of the country’s search market, Baidu will profit handsomely. However, the rising Chinese RMB can adversely affect Baidu, which reports revenue and costs in RMB while reporting its main financial assets in U.S. Dollars. This puts it in the same boat as other American companies, such as McDonald’s (MCD: Charts, News, Offers), which are hurt by a declining U.S. dollar despite generating the majority of its income overseas. As Baidu grows, government scrutiny is expected to increase as well. While Baidu was the government’s champion in the national battle against Google, it has been reviewed multiple times for promoting “socially harmful” material, copyright infringement of scanned books as well as pirated MP3s and software. These are the same accusations which have dogged Google in past years, and as Baidu grows, the larger the target on its back will become. Although its primary competitor, Google, has hit a roadblock in China, it still remains Baidu’s primary threat, sitting on nearly 20% of the Chinese search market by using its Hong Kong portal. If the Google ever re-negotiates its terms with the Chinese government and returns to the mainland, expect Baidu shares to drop significantly. Google is also Baidu’s main threat in the mobile search arena, and has been using its popular Android software as a profitable backdoor to China. Android has become such a concern to Baidu that the company has reportedly been developing its own Linux-based mobile operating system to counter Google’s advance. Shares of Baidu trade at 38 times forward earnings, signifying lofty expectations ahead.
Other News About BIDU
Someone’s Lying About Facebook’s Plans For China
Should any of the buzz be believed?
Baidu chief cautions China Web companies against “hot” IPO market
Baidu’s CEO warns against a possible Chinese dot-com crash.
Other Stocks in the News
Bing Steps Up Payoff For Microsoft, Snags 30% of Internet Search Market
Microsoft rises as an unlikely underdog.
Microsoft attacks Google over security
Microsoft criticizes Google over security loopholes.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Nice headline! Not even true! FB in China is no slam dunk and why would all the users of SINA and the rest of the big players switch over to yet another platform??? FB doesn’t have anything other compainies in China have at the momment…Bidu is desparate and if FB wants to be censored by the Chinese government, thats what will happen…They won’t have a site up for a year even if they do partner with someone. The Z-Man has other fires to put out now like the guy that wants 50% of Facebook and has the emails to prove it!
You jumped the gun like the rest of the media…Stop the false news if you want to be credible…
The problem is that it’s too late for Facebook ! More than 7 years seven to start in Asia is too long. Moreover, Facebook has reached the end of its metheoric growth and will probably fail very soon… Fbook has never update its aspects to become necesary and useful like Google is. Moreover, other social networks website like Outlyf or else have the power to destroy Facebook and maybe Google one day.
it’s very helpful! I’m waiting for it! 凌雪I’ll come back one day.