ePlanet Ventures

Baidu.com Quadruples in Debut
'China 's Google' Debut
Is Flashback to Hysteria
Of the Net-Stock Boom

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
August 7, 2005 5:50 p.m.

In the three months ending June 30, Baidu's revenue rose 53% to $8.4 million from the previous quarter, and net income almost quintupled to $1.5 million. As of March 31, Baidu had $23.5 million in cash and equivalents and no outstanding debt.

In its IPO filing with the Securities and Exchange Commission, Baidu said it faces significant competition from Google, Yahoo and Microsoft Corp., as well as from other Chinese Internet portals such as Netease.com Inc., Sina Corp. and Sohu.com Inc. Requests for MP3 music files account for 21% for Baidu's search requests, a frequency that has provoked two lawsuits for alleged copyright infringement. Another stumbling block could be China 's government, which has a history of censorship. In 2002, the government shut down Baidu for a week and fined the company for producing search results with content that were considered "socially harmful," according to SEC documents.

Baidu also has a dual-share class structure, with its B-class shares -- all held by the company's original owners -- entitled to 10 votes to every A-class share's one vote, giving new shareholders little control over issues such as elections of directors or a potential merger or sale of the company.

Renaissance Capital raised concerns about the offering in a research note this week on its Web site, IPOhome.com. Analysts said the company's long-term investment risks are substantial. One warning sign: 21% of the IPO shares in Baidu are coming from insider owners, including CEO Li, a surprising rush to exit a company that is supposed to be a "baby Google."

Small Deal Size

Still, Baidu holds a big chunk of market share in China , the world's most populous country that is growing at a fast clip. According to iResearch, the number of Internet search users in China is projected to grow from 115 million in 2005 to 187 million in 2007, as cited in Baidu's IPO prospectus. Total online marketing revenue in China would amount to approximately $130 million in 2004, according to a study by IDC. "The paid search market is expected to be the fastest growing segment of online marketing in the Asia Pacific region (excluding Japan ) through 2007," Baidu.com said in its IPO document.

The first-day surge stems in part from the relatively small size of the deal. With only 4.04 million shares in the IPO and signs of interest from both retail and institutional investors, demand drove up the price. Wednesday, Baidu lifted its estimated range from between $19 and $21 to between $23 and $25 and increased the size of the IPO to 4.04 million shares from 3.6 million. Underwriters ended up boosting the price again. "I had this rated very highly . but I thought this would go up 10, maybe 20 points at the most," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald. "This is something else."

Web search engine Baidu.com, billed as China's answer to Google Inc., more than quadrupled to $122.54 a share in its debut Friday, turning in the biggest first-day gain since the heady days of the dot-com boom.

Baidu lifted its offering price twice and beefed up the number of shares it sold to the public in the days leading up to the initial public offering as demand continued to surge. The stock priced late Thursday at $27 a share and quickly jumped to $66 when trading opening shortly before noon Friday on the Nasdaq Stock Market. At one point, shares rose more than fivefold to $151.20.

It was the best stock debut since software maker Selectica Inc. soared 369% in March 2000, according to Dealogic Inc. (Selectica finished unchanged Friday at $3.15 on Nasdaq.) The biggest IPO in the era of Internet mania was VA Linux Systems Inc., which soared almost 700% in December 1999.

"This is a pure play on what's seen as the best and fastest-growing industry," said Alex Motola, fund manager at the Thornburg Core Growth Fund. A widely circulated rumor that Google had attempted to buy Baidu fueled interest in the stock and "gave investors confidence," he said.

The hot debut comes almost a year after Google electrified Wall Street by going public at $85 a share. Baidu, which trades under the symbol "BIDU" -- an echo of the pronunciation of its name, "by doo," which was inspired by a 900-year-old love poem -- hoped to catch some that lightning in a bottle.

It succeeded: Baidu is the first stock to end its trading debut at more than $100 a share since Google's IPO, according to Thomson Financial. The company's stock-market capitalization went from a modest $898 million at the start of the day to about $4 billion at the close -- a lofty appraisal for a company that only recently became profitable.

"This is a 'son-of-Google' investor mentality," said David Menlow, president of IPO Financial, an industry newsletter. "Everyone remembers they could have had Google at $85 and don't want to let it happen again."

Chief Executive Robin Li, in an interview Friday on CNBC, said he expects Baidu's business to grow as the amount of Chinese information online increases. "The penetration rate is still very low, it's still in single digits," he said. "The amount of Chinese information online also gets larger and larger. We see consumers increasingly depend on search engines, depend on Baidu."

He said the company will continue to remain a Chinese-information-focused company and will follow Chinese government regulations. "We are a locally operated company, we do need to obey the Chinese law," Mr. Li said.

The IPO raised a total of $109.1 million -- $86.6 million for the Baidu, which sold 3.21 million American depositary shares, and the remainder for company insiders who sold 831,706 shares. Baidu said it plans to use the proceeds from the IPO to expand its customer base and for general purposes.

Paul Bard, an analyst at IPO research specialist Renaissance Capital, said Baidu's IPO bisected two hot spots -- search engines and China . "Baidu is operating in the largest and fastest growing market in the world, so it has created a lot of intrigue and excitement about the company," he said.

'Rush to the Exits'

Baidu often is compared to Google, which owns about 2.6% of the Beijing-based company. Like Google, Baidu makes most of its money by selling text-based ads tied to search requests and generating commissions whenever Web surfers click on the commercial links. But the five-year-old company is tiny by U.S. standards and has only a fraction of revenue and profit that the Silicon Valley titan had when it went public. Plus, Baidu comes with a host of risks, including restrictions on stock ownership and tough competition.

Small Deal Size

The first-day surge stems in part from the relatively small size of the deal. With only 4.04 million shares in the IPO and signs of interest from both retail and institutional investors, demand drove up the price. Wednesday, Baidu lifted its estimated range from between $19 and $21 to between $23 and $25 and increased the size of the IPO to 4.04 million shares from 3.6 million. Underwriters ended up boosting the price again. "I had this rated very highly. but I thought this would go up 10, maybe 20 points at the most," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald. "This is something else."

When Baidu priced at $27, its $898 million market value was about 42 times net revenue of $21.6 million for the trailing 12 months, according to Renaissance. Google, by comparison, is valued at a trailing-revenue multiple of 19 times, while Yahoo is valued at 11 times. Still, Baidu's growth has been rapid, almost tripling net revenue in the recent quarter -- double Google's 98% growth rate and more than triple Yahoo's 51% rate.

"Despite a litany of longer-term risks, Baidu's comparison with Internet search phenom Google has generated enormous buzz around this offering," Renaissance said in a weekly IPO column. "For that reason, along with a small float and a valuation that many will view as attractive relative to Baidu's perceived growth prospects, Baidu's IPO debut is bound to be a success for those lucky few who can actually get shares at the offer price."

Mr. Li, the company's 37-year-old chairman, CEO and co-founder was formerly an engineer at Infoseek, a search pioneer acquired by Walt Disney Co. Mr. Li received a bachelor's in information science from Peking University and a master's degree in computer science from the State University of New York at Buffalo. His 25.8% stake is valued at $203 million at the IPO price.

Goldman Sachs & Co., Credit Suisse First Boston and Piper Jaffray acted as underwriters.

--MarketWatch, Dow Jones Newswires and Associated Press