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Qihoo 360 Technology Co Ltd (QIHU) Better Buy Sogou Before Baidu.com, Inc. (ADR) (BIDU) Does

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Shares of Qihoo 360 Technology Co Ltd (NYSE:QIHU) fell 2% yesterday — and Sohu.com Inc (NASDAQ:SOHU) moved nearly 5% higher — for the same reason.

A couple of days after posting blowout quarterly results, Qihoo 360 Technology Co Ltd (NYSE:QIHU) priced a $550 million convertible debt offering. There’s been a rumor circulating since last month that it was eyeing a deal to buy Sohu’s Sogou search engine. Reports claimed that negotiations fell apart earlier this month, but then why is Qihoo raising money?

Qihoo 360 Technology

It closed out its latest quarter with $378 million in cash on its debt-free balance sheet, generating healthy cash flow of $86.4 million during the quarter itself. Why take on debt — and dilutive debt, at that, given the convertible nature of the financing — if it isn’t eyeing a big move?

Buying Sogou — China’s third-largest search engine — makes sense. Third-party traffic trackers have Qihoo 360 Technology Co Ltd (NYSE:QIHU) up to a nearly 15% share of the market with Sohu’s platform commanding a 9% slice. Joining forces would give it nearly a quarter of the market. That would still be a far cry from Baidu.com, Inc. (ADR) (NASDAQ:BIDU) serving up roughly two-thirds of the country’s queries, but it would give Qihoo more ammo as it recently began monetizing its search traffic.

Naturally, Qihoo 360 Technology Co Ltd (NYSE:QIHU) doesn’t have to buy Sogou. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has made some large acquisitions this year as it diversifies into mobile apps and online video, and Qihoo may be ready to follow suit. Qihoo could be targeting ways to expand its leadership in the Internet browser or security software markets. It could be exploring an entirely new niche. It could just be building up its war chest, because you can never have enough money when you’re looking up at the billions on Baidu’s balance sheet.

However, making a deal for Sogou is the move that makes the most sense now. Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s had an amazing rookie year with its search engine, but growth will be harder to come by now that it has to begin growing at Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s expense.

Qihoo’s on a roll. Revenue more than doubled in its latest quarter, with adjusted earnings shooting 147% higher. The stock has nearly quadrupled. It doesn’t need to snap up Sogou to keep the growth and gains coming, but it certainly wouldn’t hurt to latch on to a somewhat popular platform that will make its own organic search engine more appealing to marketers.

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