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Baidu.com, China's Google, Raises $109 Mln in IPO (Update3)

Baidu.com, China's Google, Raises $109 Mln in IPO

Aug. 5 (Bloomberg) -- China's Baidu.com Inc., a search engine that models itself on Google Inc., raised $109 million in an initial public offering as investors seek to profit from rising Internet use in the world's most populous country.

Baidu.com sold 4.04 million shares at $27 each, according to a person familiar with the transaction. The price was higher than the $23-to-$25 range the Beijing-based company outlined in an Aug. 3 filing with U.S. regulators. Stefan Anikewich, a spokesman for Baidu.com in New York, declined to comment.

The demand for Baidu's shares underscores investors' appetite for Internet companies in China, where spending on advertising linked to Web searches may quadruple to 5.62 billion yuan ($690 million) by 2007, according to Shanghai-based iResearch Inc. Shares of Google, which owns about 2.6 percent of Baidu.com, sold in August 2004 for $85 and are now near $300.

``It's going to be a hot deal and it's going to trade very well,'' said Paul Bard, an analyst with Renaissance Capital LLC in Greenwich, Connecticut, before the price was announced. ``Baidu might be one-eightieth the size of Google but it has the potential to grow into something much larger'' than it is now.

Goldman Sachs Group Inc., Credit Suisse First Boston and Piper Jaffray & Co. managed Baidu.com's share sale, which represented about 13 percent of the company, according to the filing. Baidu.com's American depositary shares will start trading later today on the Nasdaq Stock Market under the symbol ``BIDU.''

Sales Tripled

At $27 a share, the company will have a market capitalization of about $872.6 million, 64 times its 2004 sales. That's based on 32.3 million shares outstanding, the number quoted by Baidu in regulatory filings.

Baidu.com's sales almost tripled to 110.9 million yuan in 2004 from a year earlier. The company had net income of 12 million yuan last year, compared with a net loss of 8.89 million yuan a year earlier. The company's market value is 590 times that profit.

The price-to-earnings ratio ``is sick,'' said Enzio Von Pfeil, chief executive of Commercial Economics Asia Ltd., said in his personal capacity. ``The good news is that Google's in there; the bad news is that if we have another tech crash, Baidu is going to the last one in and the first out.''

Shares of Google, which raised $1.67 billion in its IPO and has a market value of $83 billion, rose 43 cents to $297.73 at 4 p.m. in Nasdaq Stock Market composite trading.

Baidu had planned to sell 3.2 million shares and shareholders offered 831,700 shares, according to the filing. The company had planned to sell 3.2 million shares and shareholders offered 831,700 shares, according to the filing.

Founders Robin Li, 37, and Eric Xu, both Chinese citizens who were educated in the U.S., are both selling stock.

Selling Stakes

Li, the company's chief executive, had planned to sell 250,000 shares, or 3 percent of his stake, according to the Aug. 3 regulatory filing. He will retain a 22 percent stake in the company, the filing said, worth $196.3 million based on the $27 offer price.

Li got his masters degree in computer science from the State University of New York in Buffalo. He worked as an engineer for search engine Infoseek Corp. before returning to China, Asia's second-biggest economy, to found Baidu.com.

Xu got his doctorate from Texas A&M University and planned to sell 160,000 shares, or 7 percent of his stake, according to filings. He would be left with a 7 percent stake, worth $59.9 million at the $27 price.

Competition

Cayman Islands-based Draper Fisher Jurvetson ePlanet Ventures L.P., a venture capital firm, owns 28 percent, and didn't plan to sell any shares in the IPO, filings said. Danville, California-based Integrity Partners holds an 11 percent stake.

Baidu faces competition from U.S. companies including Google, Yahoo Inc. and Microsoft Corp. Chinese Internet companies including Sohu.com Inc. and Netease.com Inc., which are based in Beijing, and Shanghai's Sina Corp. are also vying for the country's Web surfers. All three companies trade on the Nasdaq Stock Market.

``You have to keep in mind is that these markets are becoming more competitive,'' Bard said. ``People set these huge expectations. I don't think they're going to start producing numbers like Google right away.''

Google and Yahoo! Inc., which rank second and third behind Baidu.com in China, are also making investments in the country. Yahoo acquired 3721 Network Software Co. for as much as $123 million in November 2003. Google in July tried to hire former Microsoft executive Kai-Fu Lee to open a Chinese research lab.

Baidu.com accounts for 37 percent of the Chinese search market, according to Analysys International Ltd., a Beijing-based market researcher. Google accounted for 23 percent and Yahoo for 21 percent.

Song Dynasty

Li and Xu picked Baidu.com's name from a poem written during China's Song dynasty about a man searching for his lover and going ``all the way to look for her,'' according to the company's Web site.

Baidu.com's site echoes Google's stark pages. Baidu.com has a single search box accompanied by a blue paw-print. Like Google, Baidu.com makes money by allowing advertisers to bid in online auctions to be displayed alongside search results. Advertisers pay a fee when users click on the ads.

The number of Internet users in China rose 18 percent to 94 million in January, Piper Jaffray Co. analyst Safa Rashtchy said in a July 8 note. China has a population of 1.3 billion.

Bard said Baidu also faces the risk of regulatory changes from the Chinese government.

`Sophisticated System'

China has ``the most extensive, technologically sophisticated, and broad-reaching system of Internet filtering in the world,'' according to a study published by the OpenNet Initiative, a group of academics from Harvard University, the University of Toronto and the University of Cambridge.

Chinese search engines also have to deal with language nuances. As sentences in Chinese are made up of phrases that represent words in English, search engines need to break down the phrases before matching them against a user's search, Baidu.com said in regulatory filings. Chinese phrases also have more meanings than their English equivalents, adding to the complexity.

To contact the reporter on this story:
Jonathan Thaw in San Francisco at [e-mail].


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