Tencent: going private is safest option for Chinese tech companies

A Chinese state news agency once boasted that its news anchors could broadcast 24 hours a day on its website. Thankfully, those broadcasters are not human but 3D bots made using artificial intelligence by Sogou, China’s second-biggest search engine. Approval for Tencent’s offer to take New York-listed Sogou private is well timed.

China’s antitrust regulator has nodded through the $3.5bn offer made last year. Tencent already holds a 39 per cent stake in Sogou and will buy out the minorities. Based on the initial terms, when Tencent offered $9 per share in cash, the offer is well below Sogou’s 2017 IPO price of $13. But against the undisturbed price from July the premium is 88 per cent. At just under 2 times revenues, it hits the midpoint of the five-year range.

The deal makes sense for investors in both companies. Following Beijing’s crackdown on Didi following its US listing — its share price has dropped 32 per cent from the peak — expectations have fallen. Any premium should be welcome. Sogou, like its US listed peers, would do well to go private to protect shareholders from further diplomatic tensions. It can, at a later time, list in Shanghai or Shenzhen. 

For Tencent, which has bet heavily on AI since 2016, having Sogou under its roof should boost its research and development in machine learning and speech recognition.

The much larger Tencent faces rising risks. As the largest gaming, social media and investment group in China, antitrust watchdogs already target the company. Sogou, one of the largest local search engines, has not escaped scrutiny either. It is one of many apps that regulators have claimed engage in improper collection and use of data.

As a fully consolidated entity, the growth potential for Tencent/Sogou is significant. Alone, Sogou looks more vulnerable. Tencent’s decision to take it private makes sense. For many US-listed Chinese groups going private may be the safest option.

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