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Long shot

20 July 2016 By Robyn Mak

The odds are stacked against an activist shareholder who is challenging China’s top search engine. New York-based Acacia Partners objects to a bid from Baidu’s chief executive for the group’s Qiyi video subsidiary. The U.S. fund is right to highlight potential conflicts of interest. But it is hard to see an activist victory here.

This is the first time the $56 billion web giant has faced public shareholder dissent. In February, boss Robin Li teamed up with Qiyi’s CEO to make an offer for China’s second-largest video platform. The pair proposed to buy Baidu’s 80.5 percent stake for $2.25 billion.

Now, as a special committee of Baidu’s independent directors reviews the deal, Acacia has hit back, saying the sale is against the long-term interests of the company and its shareholders. Instead, it suggests, Baidu could keep the business, float it, or spin it off to investors.

Acacia has a point. There is an inherent conflict of interest in that Li, who has 54 percent of Baidu’s votes, sits on both sides of the deal. Acacia also argues the bid, which values Qiyi at $2.8 billion, is too low. It cites a report from 86Research which estimates the video service is worth more than double that.

Moreover, shareholders are somewhat in the dark as to how to value Qiyi. Baidu only started to break out limited information, including revenue and operating profit, for Qiyi in April. But it does not provide other key data, such as subscriber numbers.

Victory looks unlikely, though. Acacia’s 2.6 million shares equate to less than 1 percent of U.S.-listed Baidu. And shareholder approval is not required.

The episode highlights the sway that Li, as co-founder, chairman, CEO, and controlling shareholder, holds over Baidu. The same goes for China’s other internet giants. For example, Alibaba, the $205 billion e-commerce empire, is effectively controlled by founder and Chairman Jack Ma through a partnership of senior executives. Ma’s decision to shift Alibaba’s payments arm – now valued at $60 billion – into a separate vehicle he also controls remains controversial. Governance, disclosure and dealmaking are still issues for Alibaba today. But as with Baidu, any activists tempted to take on Alibaba would probably not get very far.


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