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Qihoo Better Buy Sogou Before Baidu Does

Rick Munarriz
August 29, 2013

Shares of Qihoo 360 (NYSE: QIHU) fell 2% yesterday -- and (NASDAQ: SOHU) moved nearly 5% higher -- for the same reason.

A couple of days after posting blowout quarterly results, Qihoo priced a $550 million convertible debt offering. There's been a rumor circulating since last month that it was eyeing a deal to buy Sohu's Sogou search engine. Reports claimed that negotiations fell apart earlier this month, but then why is Qihoo raising money?

It closed out its latest quarter with $378 million in cash on its debt-free balance sheet, generating healthy cash flow of $86.4 million during the quarter itself. Why take on debt -- and dilutive debt, at that, given the convertible nature of the financing -- if it isn't eyeing a big move?

Buying Sogou -- China's third-largest search engine -- makes sense. Third-party traffic trackers have Qihoo up to a nearly 15% share of the market with Sohu's platform commanding a 9% slice. Joining forces would give it nearly a quarter of the market. That would still b