Buyout Deal Offers An Attractive Opportunity In Qihoo Stock

  • Chinese internet and security company Qihoo joins the privatization trend of Chinese companies with a $9.3B buyout deal.
  • The Qihoo deal premium fluctuated greatly in 2015 in light of the Chinese economy’s weakness and rebound.
  • The deal currently offers 5% upside in Qihoo stock and is expected to close during the first half of 2016.

Four years after it went public on the New York Stock Exchange in early 2011, Chinese internet and security services company Qihoo is going private in a $9.3B deal. The buyout offer was handed to Qihoo’s management back in June by a consortium of investment firms led by Chairman Zhou Hongyi; it includes Sequoia Capital China and Citic Guoan, among others. Qihoo’s buyout offer was part of a larger trend of Chinese companies that are traded in the U.S. privately, where people can IPO them in China to benefit from a potential premium. As shown in the chart, this privatization trend includes 38 Chinese companies in 2015, which is the highest annual deal and aggregated deal value since 2003.

QIHU_Chart 3_122415

Like many other Chinese ADS traded in the U.S., Qihoo stock fluctuated sharply throughout the year. As shown in the chart below, Qihoo stock price yielded an approximately 22% return year-to-date but declined sharply between June and September; this was a period of weakness in the Chinese economy coinciding with the decline of the Shanghai Stock Exchange Composite Index, which dropped by 40% and threatened to strengthen the headwinds that equity markets felt from the commodities prices crash. Chinese ADS's like Qihoo were hit the hardest, and Qihoo stock price dropped much like the Shanghai Composite fall of 40% to a yearly low of $40.11.

QIHU_Chart 1_122415

The consortium offered to buy out Qihoo stock at a price of $77 per ADS, which reflected a 10% premium above the stock price on the day of the offer. However, as the Chinese economy tumbled and the sell-off in Chinese ADS's like Qihoo continued, the deal premium increased to a peak of 82% during September (when Qihoo stock price reached its lowest point). That incredible premium reflected the market concerns over the chances that the deal would be closed and executed in light of the economic uncertainty in China. However, as the Chinese authorities managed to stabilize the economy through a Yuan devaluation, stimulus plans, and even active stock-buying on the open market, the Chinese stock market slowly rebounded and triggered a rally in these Chinese ADS's like Qihoo.

Chinese ADS's rose across the board when Alibaba (NYSE:BABA) surged 50% after the end of September, Baidu (NASDAQ:BIDU) increased 45%, (NASDAQ:JD) rose in 37%, and Qihoo jumped 73% to a yearly high of $73. As shown in the chart below, the rally for Qihoo stock narrowed the deal premium to only 5% today.

QIHU_Chart 2_122415

As mentioned above, once the deal is closed, Qihoo is expected to go public in China and join a long list of local companies like Homeinns Hotel Group and dating site that took the same route. While this process accelerates the local IPO industry in China, it may decrease the number of Chinese IPOs in the U.S. Investors could take advantage of this process and generate solid returns with low risk by investing in such deals.

According to the deal terms between Qihoo and the consortium, Qihoo’s shareholders will receive a total of $9.3B in a cash-only transactions, which includes a $1.6B debt redemption of Qihoo’s debt. Both parties entered a definitive agreement toward completing the deal. The deal is expected to close during the first half of 2016, and investors may still find some good entry points during the year that will allow them to generate a bigger return than the 5% upside currently reflected. Going into 2016, the Qihoo buyout deal and the Chinese ADS's move to China should be on investors’ radar as attractive risk/reward ratio investments.

I'd suggest you keep your eye on Qihoo stock in 2016 and watch out for any dips as opportunities to enter the stock, to gain from the buyout deal before it happens.

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