Here’s Why Withdrawal Of Offer to Buy Out “iQiyi” is the Best Solution

A consortium led by Baidu's Chief has scrapped the deal due to disagreement over purchase price.

Here’s Why Withdrawal Of Offer to Buy Out “iQiyi” is the Best Solution

By: Faraz Haleem Published:

A consortium led by Baidu’s Chief has scrapped the deal due to disagreement over purchase price

Baidu Inc. (ADR) (NASDAQ:BIDU) announced Monday that the buyer group led by Baidu’s CEO, Robi Li has withdrawn its offer worth $2.3 billion to buy stake in the company’s online video unit iQiyi due to disagreement over purchase price. The offer faced a lot of criticism from the company’s active investors when it was first submitted in February.

The aborted bid came after Acacia Partners, a New York hedge fund that owns more than $400 million in Chinese Google shares, wrote a letter to Mr. Li last week. In the letter, Acacia criticized the move, citing low sale price as the reason. The hedge fund argued that video unit value of $2.8 billion was way less than the value of its rival Youku Tudou that Alibaba Group Holding Ltd (NYSE:BABA) bought for $4.8 billion in 2015.

According to analysts, the deal would have allowed the consortium to raise money from Chinese stock markets. However, changes in regulations, made it difficult for the group to pursue their objective. According to The Wall Street Journal (WSJ), neither corporate governance issue nor investor’s letter led to the withdrawal. Essentially, Mr. Li would have been left with only 20%, with no voting control, the news agency reported. Also, in-depth analysis indicates that the withdrawal of the deal is in favor of Mr.Li’s group and iQiyi. First, the buy-out of Chinese Netflix would have put Mr. Li under immense pressure who is already entangled in the battle with Tencent and Alibaba and China’s growing economic slowdown. Moreover, foreign currency volatility along with regulatory environment made the deal complicated for the buyer group. Looking forward, iQiyi would face hurdles in going public in the future as it need to be more profitable to attract investors.

IQiyi had more than 20 million paid subscribers as of June, which makes it China’s top online video site. 86Research, a Shanghai–based firm, valued the online video site at $5.8 billion, Tencent Holdings Ltd’s online video business at $7.4 billion, and Youku at $4.7 billion.

The Chinese online industry has been growing tremendously over the past few years. According to 86Research, online video market in China is expected to reach $7.93 billion (53 billion yuan) by 2018, up from $2.4 billion (16 billion yuan) in 2014. Baidu, which holds 70-80% of market in search, has great potential to expand its presence. However, the company has been facing cyber controversies and tight cyber control, following the death of Chinese student, who used Chinese Google to cure his illness. The Street expects the company to post weak financial results the second quarter, later this week.

The recent ‘acquisition interest’ has awakened China Google to work on the improvement of iQiyi instead of dumping it altogether. Conventionally, dumping a business with sluggish growth was the more preferred action taken by the businesses, however, in today’s fast growing world it is essential, particularly for Baidu, to integrate its multiple products to boost its profit margin. Baidu stated in a press release: “Online video is an important vertical for Baidu, in which iQiyi remains a key strategic partner. Baidu will continue to support iQiyi in its continued growth and leadership in the industry.”

One takeaway of the unsuccessful deal is that it has given iQiyi an enterprise value. The proposed amount of $2.3 billion shows that current financial worth of the online streaming service is somewhat more than the amount bid by the interested investors. Although, the deal didn’t turn out well for consortium it has left positive impacts on the financial worth of iQiyi, which would subsequently bolster Baidu’s profits.