Tencent has been granted full control of Sogou, a major search engine that could help the company compete with market leader Baidu, according to Chinese regulators.
The approval comes as a relief from Chinese regulators, who have recently been cracking down hard on internet behemoths, stifling the ambitions of some of the country’s most powerful corporations.
The buyout, which will take New York-listed Sogou (SOGO) private, was “unconditionally approved” by China’s State Administration for Market Regulation (SAMR) on Tuesday. Tencent (TCEHY) now owns the entire search firm for $3.5 billion. It is the majority shareholder in the company, with a current stake of about 39%.
“This merger is powerful,” said Edith Yeung, a general partner at Silicon Valley venture capital firm Race Capital and author of the “China Internet Report.”
Tencent, with Sogou under its wing, could eventually become the largest search engine in mainland China, according to Yeung, “if and only if they know how to leverage Tencent’s huge [trove] of data.” Sogou is currently one of China’s most popular search engines, trailing only Baidu, the industry leader (BIDU).
Investors were quick to react to the news. Tencent’s stock rose 3.9 percent in Hong Kong on Tuesday, while Sogou’s stock rose 2.5 percent in New York premarket trading. Other tech stocks benefited from the news as well. The Hang Seng Technology Index in Hong Kong increased by 1.9 percent on Tuesday.
The regulators’ green light comes at a time when China is cracking down on Big Tech, sending markets into a frenzy.
Tencent’s plan to merge two of China’s top video game streaming websites, Douyu (DOYU) and Huya (HUYA), was recently scuttled by regulators (HUYA). Tencent is the largest shareholder in each of these companies.
Tencent’s stock dropped on Monday as a result of the news. Since its January high, the company’s market value has dropped by nearly $261 billion.
The SAMR expressed concerns in a statement released on Saturday that the video game merger would give Tencent too much control over the market. Both companies are listed on the New York Stock Exchange and have a combined market capitalization of $5.1 billion.
Chinese regulators have been cracking down on what they see as anti-competitive behavior within the country for months, but the focus appears to have shifted in recent weeks to companies whose shares trade internationally.
The country’s powerful internet watchdog, the Cyberspace Administration of China, proposed over the weekend that any company with data on more than one million Chinese users must seek the agency’s approval before listing its shares overseas. It proposed that companies submit IPO materials for review to the agency prior to listing.
“[It’s] very tough to say,” she said. “I would take the wait-and-see attitude.”
In the meantime, Halley believes Chinese tech stocks will continue to be under pressure in the near future.
“I believe it is but a temporary reprieve,” he said of Tencent’s approval. “I believe that [Chinese] political risk will continue to act as a discounting price factor on mainland technology stocks going forward.”