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Sohu-Tencent Deal Hurts Qihoo In Search Engine Fight Vs. Baidu

The deal announced Monday between China's Tencent and Sohu.com could shift the Internet search landscape in China, potentially hurting search upstart Qihoo 360 Technology's bid against search leader Baidu.

China e-commerce giant Tencent said Monday that it paid $448 million for 36.5% of Web search engine Sogou, which is owned by Sohu (SOHU). The deal lets Tencent increase its share to 40% in the "near future," Tencent said in its press release.

Qihoo (QIHU), a security software maker that in August 2012 launched its own search engine, had long been seen as a potential buyer of Sogou, which is the No. 3 search engine in China behind Qihoo and leader Baidu (BIDU).

Analysts say Qihoo has gained about 18% of China's search market, but it's still far behind dominant Baidu, which has more than 70%.

The Tencent deal is a negative for Qihoo, Wedge Partners analyst Juan Lin wrote in a research note to investors Monday.

"We believe that Tencent's investment into Sogou will change the competitive landscape of the Chinese search engine market," Lin wrote. "... we see it as the direct competitor to Qihoo and may delay the development of Qihoo's search engine.

Qihoo shares fell nearly 6% to 82.93, while Sohu shot up 7.5% to 69.61, just below July's two-year high. Baidu fell 5 cents to 142.59.

Baidu stock has rebounded the past two months and touched a 17-month high of 148.25. It ranks No. 38 in Monday's IBD 50 listing of top stocks.

Qihoo, though, has been a longtime IBD 50 stock, more than tripling in the past 12 months. It's No. 22 in the latest IBD 50.

The deal is "relatively positive" for Baidu, wrote Lin. Baidu's "biggest threat from Qihoo is removed" because Qihoo won't be able to buy Sogou and add market share, the analyst says.

Under the deal, Tencent and Sogou will share data and search technology, along with other products.

The deal will "significantly elevate (Sogou's) position in the highly competitive PC search market, and even more so in the rapidly evolving mobile search market," Sohu CEO Charles Zhang told China Daily.