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Why Sohu Stock Soared Today

By Jon Quast – Sep 29, 2020 at 12:16PM

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The company is selling one of its subsidiaries for cash.

What happened

Shares of Sohu.com Limited (SOHU 0.27%) soared on Tuesday after the company announced its subsidiary Sogou (SOGO) is being acquired by Chinese conglomerate Tencent Holdings (TCEHY 2.52%) for $1.18 billion. Sogou stock barely moved on the news since it already had spiked higher in July when Tencent first made the buyout offer.

Tencent stock was also largely unchanged. By contrast, Sohu stock was up 8% as of 12:00 p.m. EDT, but had traded as much as 20% higher earlier in the session.

So what

As is often the case with stocks out of China, the business structure can be a little complicated. Sohu operates various web properties and owns subsidiaries, including search engine Sogou and former publicly traded online-game company Changeyou. As per the announced agreement, Tencent is acquiring all of Sogou in the deal and taking it private.

A man holding a tablet that is projecting a holographic image of a rising arrow on a stock chart.

Image source: Getty Images.

As a result, Sogou's American Depository Shares (ADS) will stop trading on the New York Stock Exchange when the deal closes. 

Now what

Tencent's buyout of Sogou is expected to take place in the fourth quarter and is worth $9 per share. Sogou's ADS are within about 1% of that price, offering little upside for shareholders. In short, there's not much reason for investors to buy or hold Sogou stock at this point.

Sohu will get an infusion of cash that it can plow back into its business, and that's good news. The company's total revenue was only up 5% year over year in 2019, and it was down 9% year over year in the second quarter of 2020. It needs to find growth avenues, and having a pile of cash could help with that if smartly allocated .

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.

Stocks Mentioned

Sohu.com Stock Quote
Sohu.com
SOHU
$14.90 (0.27%) $0.04
Sogou Inc. Stock Quote
Sogou Inc.
SOGO
Tencent Stock Quote
Tencent
TCEHY
$39.90 (2.52%) $0.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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