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Baidu Inc. (ADR): Eight Men Out

By Rick Munarriz - May 13, 2015 at 3:00PM

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China's leading search engine cracks down on illegal corporate activity.

Source: Baidu. 

It isn't easy to be a corporate executive in China, particularly if you don't always play by the country's stringent rules. Reuters reported this week that Baidu (BIDU -1.61%) has fired eight executives who are accused of criminal behavior.

The actual misdeeds aren't spelled out in the internal memo that a Baidu spokesman confirmed as authentic to Reuters. However, it does point out that those let go include senior executives in the sales and marketing department, and that authorities have detained five of the suspects.

This should not panic Baidu investors. This is an unfortunate but common event at Chinese Internet companies. China has made cracking down on corporate corruption a priority in recent years, and Baidu has become a regular target. It had to dismiss employees, including some directors, in 2012, 2013, and 2014. 

There's always the fear that corruption -- especially in this instance since it is taking place within the sales and marketing department -- could mean that Baidu's numbers were inflated by selling ads to fraudulent advertisers, particularly in the medical field where bogus providers run wild. Baidu has been down this road -- at least twice -- and it didn't have to issue any financial restatements.

The market gets this. The stock inched less than 0.5% lower on Tuesday following the news, essentially taking the development in stride.  

It could be that investors know Baidu has a history of bouncing back from these setbacks. The stock is nearly a 20-bagger since bottoming out in late 2008 after the initial scathing expose on fraudulent medical advertisers on its site took its toll. Another thing helping Baidu coast through the eight dismissals this week is that the company is too strong a growth story to be tripped up by a few employees coloring outside of the lines.

Revenue popped by  34% year over year in Baidu's latest quarter, growing substantially faster than the other publicly traded international search engine regional leaders. Baidu's margins have been tested lately as it makes a bigger play for mobile, video, and travel businesses, but the stock is fetching a reasonable 20 times next year's projected profitability. Baidu's growth has been decelerating lately, but its market premium hasn't been this narrow.

Baidu is also brimming with cash. It had the equivalent of nearly $9.4 billion in cash as of the end of March. This doesn't suggest it has enough money to buy its way out of employee malfeasance, but it does indicate Baidu has the means to continue internal policing to ensure it stays on top of any possible corruption at the corporate level. Ousting executives for straying from China's restrictive rules is never fun, but for Baidu it's a common sport that hasn't been detrimental -- much less fatal -- in the past.

 

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