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There's More Where Baidu Came From


How do you say feeding frenzy in Chinese? The moon shot of an initial public offering by Chinese Internet search engine Baidu.com Inc. -- whose $27-a-share launch on Aug. 4 jumped fivefold, to $154, before settling back to around $90 -- shattered a five-year record for the best debut on the NASDAQ. It tapped into a deep investor hunger for the next Google Inc. -- which has seen its shares triple in the past year -- and a desire to profit from the Internet in China, where some 100 million people now go online.

So will Baidu's success unleash a flood of China Net IPOs? There's good reason for excitement. Broadband subscribers in China last year more than doubled, to 43 million, and Beijing technology research firm BDA China Ltd. is forecasting the online advertising market, worth $208 million in 2004, will expand to nearly $1 billion by 2009. Although the stampede into Baidu is partly based on the search engine's similarity to Google, it also reflects optimism about that potential growth. That's why many analysts are bullish on Chinese Internet companies. "We will see an expansion of the valuations. Baidu helped that," says Piper Jaffray analyst Safa Rashtchy. Indeed, some Chinese tech companies that have been considering a flotation might now jump in. "Given the success of Baidu, I'm sure some other Google look-alikes will be inspired to [do an] IPO," says Khiem Do, head of Asian equities at Baring Asset Management.

At the same time, Baidu's offering could put a damper on a wave of mergers and acquisitions among Chinese Net companies that had been picking up. Yahoo! Inc. last year paid $120 million for control of Beijing 3721 Technology Co., and it now appears to be close to a $1 billion deal to buy a one-third stake in Alibaba.com, an online marketplace for small and midsize Chinese companies. And in February online game pioneer Shanda Interactive Entertainment Ltd. bought a 19% stake in portal Sina.com. After Baidu's performance, however, Chinese Net entrepreneurs may believe their companies are worth more than potential acquirers are willing to pay. "The Baidu IPO pushes valuations beyond the point where many M&A deals can get done," says David Liu, a managing director at investment bank Jefferies & Co.

"CROWD PSYCHOLOGY"

All this doesn't mean Baidu truly warrants its own sky-high valuation. Baidu, co-founded five years ago by former Infoseek engineer Robin Yanhong Li, is the mainland's No. 1 search engine, with 45% of the market. But the company earned just $1.45 million on $14 million in sales in 2004. At $90 per share, Baidu's market capitalization is nearly $3 billion -- which values it at more than 1,800 times 12-month trailing earnings, compared with price-earnings ratios of 70 or so for Google and Yahoo.

And Baidu faces intense competition. Its rivals include well-heeled U.S. search providers such as Google (which owns 2.6% of Baidu), smaller Chinese search sites, e-commerce players like Alibaba, and portals Netease, Sina, and Sohu. "We are in the realm of crowd psychology," says Duncan Clark, BDA's managing director.

Investors might also note that the record of Chinese Net stocks has been mixed. Of the 10 Chinese tech companies that went public last year, 7 are trading below their offering price. Online 51job Inc., which went public at $14 in September, 2004, zoomed to $55 before falling to its current $13. The one exception: Shanda Interactive, the best-performing stock on the NASDAQ last year. It went public in May, 2004, at $11 and now trades at $37.50, up 241%. Although Baidu's IPO boosted some of the laggards, they quickly fell back to where they were before the IPO. In a feeding frenzy, it seems, someone always gets bitten.

By Brian Bremner in Hong Kong and Justin Hibbard in San Mateo, Calif., with Steve Rosenbush and Heather Green in New York


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