What happened
Shares of Sohu.com (SOHU +2.88%) were climbing today for the second day in a row after Chinese tech giant Tencent (TCEHY +1.11%) made an offer to buy its Sogou (SOGO +0.00%) search engine.
As a result, Sohu.com shares were up 9.1% as of 12:22 p.m. EDT on Tuesday. Tencent was up 2% at the same time, while Sogou was actually down slightly after surging on Monday.
Image source: Getty Images.
So what
On Monday, Sohu said in a press release that Tencent, the owner of the popular WeChat app, has offered to pay $9 per American depositary share (or $2.1 billion) for the 61% of Sogou it doesn't already own. The search division contributed 58% of Sohu's revenue last year.
Sohu owns nearly a third of Sogou stock, and its market cap has risen to $680 million today, meaning that nearly all of the value seems to be coming from its stake in Sogou.
The move seems partly designed to give Sogou an opportunity to list on Asian exchanges, in Hong Kong or Shanghai, following a pattern of other Chinese tech companies like JD.com and NetEase that have listed in Hong Kong after the Trump administration threatened to eject U.S.-listed Chinese companies that didn't comply with certain accounting rules.
Sogou has been the default search engine in WeChat, so it's not surprising that Tencent would seek to take control of it, and Tencent may choose to list it as a separate company. For now, it plans to keep it as a private subsidiary, meaning it will be delisted from the NYSE.
Now what
It was unclear why Sohu stock was gaining today while Sogou was holding steady. There may be a rumor about another part of the deal, or perhaps investors are more bullish on Sohu's prospects without Sogou.
Without the search engine, Sohu will primarily be an online gaming company under its Changyou business. Considering the popularity of digital gaming during the pandemic, that could prove to be a fortuitous position as the industry has been growing briskly in recent months.
