Baidu.com, Inc. (BIDU) and Qihoo 360 Technology Co Ltd (QIHU): The War Is On

China’s leading search companies are investing heavily into their respective business developments, and have been acquiring or trying to acquire companies that will help them grow and diversify. Baidu.com, Inc. (NASDAQ:BIDU) was very active on the acquisition front, spending a part of its large cash position. On the other hand, Qihoo 360 Technology Co Ltd (NYSE:QIHU) is said to be in talks with Sohu.com Inc (NASDAQ:SOHU) about buying their Sogou search unit. These developments represent major changes in China’s search market, and will have a meaningful impact on Qihoo’s and Baidu’s future prospects. Baidu’s monopoly in the search market is at stake, and so is Qihoo’s leading position in mobile markets and security software.

Baidu keeps acquiring and introducing competing products

I wrote in my previous article about intensifying competition in the Chinese search market. Qihoo 360 Technology Co Ltd (NYSE:QIHU) is gaining share in the search market, while Baidu.com, Inc. (NASDAQ:BIDU) is trying to expand into Qihoo’s markets, like the antivirus software market, where Qihoo is the leader. Baidu released a beta version of “Baidu Guard”, a Windows XP and Windows 7 application similar to Qihoo’s “Safe Guard”. The application offers computer acceleration, system cleanup, software management and anti-Trojan functionality.

More recently, Baidu.com, Inc. (NASDAQ:BIDU) took another step into Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s territory, with the acquisition of 91 Wireless from NetDragon, in a deal valued at $1.9 billion. 91 Wireless is the top Chinese mobile app distributor, and is estimated to host around 900,000 Android apps from 93,000 developers at the end of 2012.

91 Wireless is growing fast, with a 219% surge in revenue in the first quarter of 2013. This is an aggressive move from Baidu in order to position itself in the growing mobile market. The deal will most likely result in further margin pressure, but the long-term prospects are more promising. The adoption of mobile internet in China is growing fast, and it will certainly be a growth driver for the company for years to come.

When Baidu.com, Inc. (NASDAQ:BIDU) completes the acquisition, it will have an advantage over Qihoo’s 360 Mobile Assistant, which currently has the most app downloads so far this year. However, with 457 million PC Web users and 275 million users of its mobile security products, Qihoo 360 Technology Co Ltd (NYSE:QIHU) is well-positioned to take advantage of the growing mobile market in China. Citigroup’s analyst Bin Liu says that Qihoo is clearly the leader, and that it will emerge as a leading mobile games platform.

Qihoo fights back?

Qihoo is certainly not taking Baidu’s latest moves lightly. In fact, the company’s efforts in gaining search market share are paying off, and according to the latest report, Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s search market share was around 15% in June 2013.

In addition, Qihoo has confirmed that it is in early talks with Sohu.com Inc (NASDAQ:SOHU) to buy its Sogou search engine, in a deal estimated to be worth up to $1.4 billion. The acquisition would boost Qihoo’s share of China’s search market to around 25%, making it a more formidable adversary to Baidu.com, Inc. (NASDAQ:BIDU). The talks are still preliminary, and Qihoo is trying to figure out whether it can fully integrate Sogou. Sohu.com has confirmed that it has been exploring options for Sogou, and one of the solutions might be a comprehensive strategic partnership.

Bottom line

As the war between Baidu and Qihoo 360 Technology Co Ltd (NYSE:QIHU) heats up, I am certain that there will be no clear winner, at least not in the next several years. Both companies can benefit from China’s rising search and mobile market. There is certainly room for both, and Baidu.com, Inc. (NASDAQ:BIDU) and Qihoo are good long-term investments.

In the last few years, Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s share price has advanced, while Baidu is still far from its 2011 highs. This is the consequence of Qihoo’s fast growth, while Baidu.com, Inc. (NASDAQ:BIDU)’s growth has in fact slowed down significantly. And this is especially true for Baidu’s earnings growth. But the earnings growth slowdown is mostly the consequence of higher spending, which will lead to more convincing long-term growth for the company.

It will be interesting to see how they will respond to each other’s moves in the future, and how those efforts translate into the most important things investors are interested in – top and bottom line growth and rise in their respective values. Further margin declines and growth slowdown would be major red flags, if these trends last longer than they are expected.

The article Baidu and Qihoo: The War Is On originally appeared on Fool.com and is written by Dusan Jovanic.

Dusan Jovanic has no position in any stocks mentioned. The Motley Fool recommends Baidu and Sohu.com Inc (NASDAQ:SOHU). The Motley Fool owns shares of Baidu.com, Inc. (NASDAQ:BIDU). Dusan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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