In September 2020, Sogou($SOGO) issued a notice on Tencent(HKG: 0700, $TCEHY)’s preliminary non-binding offer to Sogou. Tencent intends to buy the remaining shares of Sogou for $9 / ADS. Tencent was the largest shareholder of Sogou, holding 151,557,875 class B common shares, with a total shareholding ratio of 39.2%. If the deal is completed, Sogou will become a private, indirect wholly-owned subsidiary of Tencent and will withdraw from the New York Stock Exchange.
On July 13, the official website of the State Administration of Market Supervision disclosed the list of unconditional approval of concentration cases of business operators from July 5 to July 12, 2021. The list shows that Tencent has obtained unconditional approval to acquire Sogou’s equity.
This means Tencent finally has its own search engine!
1.Why was Tencent's acquisition of Sogou approved?
For antitrust reasons, a merger of Huya ($HUYA) and Douyu ($DOYU) has been confirmed to be halted. As for the approval of Tencent to buy Sogou, some industry insiders said that Tencent would not monopolize the search engine industry after it acquired Sogou, and this might be the main reason for the approval by the General Administration of market supervision.
2.Why would Tencent acquire Sogou?
Tencent is building a huge "empire ".
In the music industry, although TME ($TME) was called the "Chinese Version of Spotify" by many foreign media. In fact, there’re lots of differences between them. Spotify is still losing money on its main business, but TME had gained a large-scale profit last year.
In terms of business composition, TME has a more diversified business than Spotify, which relies on paid subscriptions for 90% of its revenue. Online music contributes less than 30% to revenue. Social entertainment service is the biggest growth contributor of TME.
Although Spotify is still the world's largest music platform, TME can represent the future.
In terms of mobile games, the Honor of Kings launched more content and a new season in June for the summer. The revenue of the game also increased in this period; it’s nearly a 277million US dollars, an increase of 5% on a month-on-month basis, an increase of 20.9% year-on-year. This again set a new record, ranking the world's top seller of mobile games. In addition, other mobile games under Tencent grew strongly as well. Revenues from the CrossFire and QQ Speed increased 58% and 59% on a year-on-year basis, ranking 11th and 14th.
What Tencent wants the most is not Sogou’s search engine, but Sogou Pinyin, a Chinese Pinyin input method editor. According to statistics, Chinese netizens spent most of their time on Tencent platforms. but Tencent's data is incomplete. This acquisition is a gateway for Tencent to fill its data gap.
Overall, Sogou is more a supplement to Tencent's searchability and business. WeChat has a lot of content now. Having a search engine can improve users’ experiences.
It is also widely believed that Tencent needs Sogou to strengthen the development of AI capabilities. Sogou, as an independent tool, is difficult to liquidate. However, if it can be integrated into Tencent's ecological system, it will have a greater synergy effect on many Consumer-based businesses of Tencent.
3.What is the overall effect of this acquisition?
For Sogou, it means Sohu($SOHU) will lose half of its revenue. Sohu‘s chairman Zhang Chaoyang said that he is more concerned about the profits than revenue. If the transaction is completed, Sohu will have more money to invest in the web series.
For Tencent, its share price has been rising continuously in half an hour after the news was released. As of the publication, Tencent's stock price rose by more than 5%, becoming the biggest increase since April 1. The market value has increased by more than HKD $250 billion, with the latest total market value of HKD $5.38 trillion. After acquiring Sogou, Tencent will provide resources to support Sogou's businesses, including abandoning its own search business and providing Sogou’s search engine as the prior service in Tencent's new, including WeChat. Sogou maintains maximum independence in terms of business and decision-making.
For the Internet industry,
1.From the macro level, Tencent has a clear trend, since 2019, from "informal empire" to "official empire"
It is generally believed that Alibaba (HKG: 9988, $BABA) likes to acquire, while Tencent likes strategic investment and joint venture. However, the stereotype was also formed very late. Before 2016, Alibaba didn't like to acquire; people generally thought that "Alibaba likes investment, and JD likes to do things alone". Alibaba's efforts to establish a "formal empire" through M & A began in 2016, while Tencent started in 2019. The actions of Internet giants cannot be generalized by time periods. Even if it is to move to M & A, Tencent's organizational structure is obviously more relaxed than its competitors. Its business groups and departments can still enjoy their independence. From the financial point of view, M & A can significantly increase the operating income, and investors provide higher valuations.
Tencent has repeatedly shown its determination to strengthen its own system: the acquisition of Supercell in the fourth quarter of 2019; the replacement of China Literature (HKG: 0772)’s management in the second quarter of 2020; the proposed acquisition of Sogou in the third quarter of 2020. We would not be surprised if there were more moves like these.
2. Sogou is a technical supporter of the WeChat search function. WeChat will need to strengthen the search function next
Nowadays, there’s a lot of information being produced by the WeChat ecosystem every day, but the WeChat search function is used by many. Most people may only search chat history and/or Moments. The function of "Search" has been launched for two years, but is not used by a lot of users, most people would only search for keywords in chats. If Sogou is incorporated into Tencent, the situation above may be changed fundamentally.
In the past few years, WeChat has launched new functions. Some were successful, but some were not. Search is in between: it has powerful functions, but has not been used much and paid enough attention to. Strengthening this function can further consolidate the advantages of WeChat in media content distribution. Financially, if we could search for ads such as bidding rankings (unavailable function yet), it will become an important source of income. But the specific development path of this function depends on Zhang Xiaolong's attitude.
3.Sogou Pinyin is used by a lot of people.
According to QuestMobile statistics, it’s included in the top three (higher than Taobao, Alipay, Tiktok). But because it is a tool, not a platform, it cannot produce any great strategy or financial effect. Internet giants are exploring the potential in their own ecosystem. If Tencent uses Sogou Pinyin effectively, would this provide some new ideas for new functions, or creates more traffic?
Future development trend
There are many possibilities in the future. For example, Virtual Reality (VR) technology is widely used. It is very likely that human beings can live in a virtual network society. The layout of Tencent's “empire” is slowly influencing people's lives and the development of society.
