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Baidu Spinoff Chatter Does Make Sense

By Rick Munarriz – Feb 2, 2016 at 3:40PM

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China's leading search engine should be trying to see if its parts are worth more than its sum.

Image source: Baidu. 

Companies don't often find themselves having to shoot down rumors, but Baidu (BIDU -0.20%) did exactly that late last week after a Marbridge Consulting report claimed that China's leading search giant was planning IPOs for several of its subsidiaries.

Baidu denied the report on Friday, telling Investor's Business Daily that while it has publicly announced that it is receptive to outside investment for some of its assets, there are no intentions to take nine of its subsidiaries public.

The Marbridge report claimed that Baidu was seeking to take the businesses public in China. The U.S. market wouldn't be as receptive, and that part does make sense. Baidu would be facing a cold market reaction if it chose to spin off its subsidiaries in the U.S. market.

Some of Baidu's biggest businesses outside of search include video streaming hub iQiyi, restaurant ordering platform Baidu Takeout Delivery, and group-buying site Nuomi. We've seen domestic flash sales sites, eatery ordering apps, and video services get creamed in stateside listings, and that's before considering the extra layer of risk that comes with adding a Chinese company into your portfolio.

Stateside investors have turned on all but the biggest and brightest Chinese growth stocks, explaining why so many languishing China-based companies with U.S. stock listings have gone private in the past couple of years. 

It's true that Qunar (QUNR) went public as a Nasdaq-listed company when Baidu was a majority stakeholder, but that's different. Qunar is a leading online travel company in China at a time when U.S. investors are still attracted to domestic operators. If Qunar was a group-buying site or an ad-supported entertainment streaming site it wouldn't have worked.

Did Marbridge have an inside scoop or was this just wishful thinking? It's easy to see where it is coming from. Baidu has been investing in a lot of niches. It's part of the "online to offline" or O2O push that finds Baidu trying to maximize its access to China's growing base of Internet users to offer more than just search.  

The rub in the approach is that it's paying dearly for these moves on the bottom line. Margins have been contracting over the past three years. You have to go all the way back to the third quarter of 2012 to find the last time that earnings growth outpaced gains on the top line, according to S&P Capital IQ data. Spinning off some of its profit-slurping subsidiaries would improve its profitability. It won't happen -- at least not in this climate -- but that doesn't mean that it doesn't make sense if market conditions improve.   

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Baidu, Inc. Stock Quote
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