Major U.S. shareholders oppose Baidu's privatization of iQiyi: US$2.8 billion is too low

In February this year, Baidu issued an announcement stating that its board of directors had received non-binding proposals from Baidu Chairman and CEO Robin Li and Iqiyi CEO Gong Yu to acquire 80.5% of all issued shares of Iqiyi held by Baidu based on a US$2.8 billion valuation of Iqiyi (excluding cash and debt).

In February this year, Baidu issued an announcement stating that its board of directors had received non-binding proposals from Baidu Chairman and CEO Robin Li and Iqiyi CEO Gong Yu to acquire 80.5% of all issued shares of Iqiyi held by Baidu based on a US$2.8 billion valuation of Iqiyi (excluding cash and debt).

A few months later, the privatization deal was publicly opposed by Baidu's major shareholder and American hedge fund AcaciaPartners, who questioned the US$2.8 billion valuation in an open letter and asked Robin Li to cancel the acquisition of iQiyi.

On the afternoon of July 19, Baidu told reporters in this open letter,"Baidu has always upheld the highest standards of corporate governance. Regarding the iQiyi transaction, we have established a special committee composed of independent directors to conduct an evaluation. This evaluation is currently in progress, and we will release it to investors and the public after forming relevant conclusions."

The three main reasons for major shareholders 'opposition

According to public information, AcaciaPartners is a New York-based hedge fund that focuses on long-term investments in high-quality companies. It has been a shareholder of Baidu since September 2012 and now holds Baidu's American Depositary Shares (ADS). More than 2.6 million shares, worth more than US$400 million, the shareholding is larger than most U.S. institutional shareholders holding shares in Baidu.

In an open letter to Robin Li, AcaciaPartners believes that the proposal to acquire iQiyi is contrary to maximizing the long-term interests of Baidu and its shareholders, and listed three reasons:

first, it believes that although selling iQiyi can improve Baidu's profitability in the short term, the immediate benefits are negligible compared with the long-term potential value that Baidu retains iQiyi can bring to Baidu shareholders;

second, the valuation of iQiyi is too low;

third, it is worried that Baidu's strong investment in iQiyi last quarter will become a huge gift from Baidu shareholders to future iQiyi shareholders (including Robin Li and its acquisition partners). It is worried that making this decision, which has an inherent conflict of interest, will damage the reputation of Robin Li and Baidu.

"Baidu should be a respected and important company, not a cash-out tool for personal financial benefits." AcaciaPartners also said that Baidu's past investments in web search, mobile search and online travel have demonstrated Baidu's ability to operate successfully for a long time and its consistent patient investment philosophy. As Baidu has always stated, it invests in iQiyi because it is a valuable part of Baidu's ecosystem and an indispensable part of Baidu's value positioning. The experience of Google and YouTube shows that the development of online video advertising has made the ability to generate content and determine user needs increasingly valuable and important.

The

hedge fund said that Baidu had never publicly disclosed iQiyi's operating data, making it difficult for investors to value iQiyi and evaluate the acquisition terms, but cited a report released by independent research institution 86 Securities Research on May 2 to indicate that the valuation was too low. The report once valued iQiyi at US$5.8 billion, more than twice the price of US$2.8 billion.

In addition, last year Alibaba acquired iQiyi peer company Youku for US$4.8 billion.

Regarding the open letter, the reporter contacted Baidu and received the following reply: "Baidu has always upheld the highest standards of corporate governance. Regarding the iQiyi transaction, we have established a special committee composed of independent directors to conduct an evaluation. This evaluation is currently in progress, and we will release it to investors and the public after forming relevant conclusions."

The reporter sorted out iQiyi's main capital paths before receiving the privatization offer, including: in August and December 2011, Baidu subscribed for its Series B preferred shares for US$45 million, and on November 3, 2012, it acquired the shares held by Providence, the former second largest shareholder of iQiyi, becoming its single largest shareholder; in 2013, Baidu spent US$370 million to acquire PPS to merge PPS and iQiyi; On November 19, 2014, Xiaomi invested in iQiyi with a strategic investment of US$300 million, and Baidu increased its investment in iQiyi.

Editor: Nancy