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On Tuesday, Baidu.com (NASDAQ:BIDU) posted record earnings of $0.31 per share for Q3 2006. BIDU currently has a P/E around 100, and has had earnings growth of approximately 450% during the last year. Following earnings, BIDU has been hit due to the guidance which was posted about 6% lower than many analysts were expecting.

Historical Rumor Data
StockRumors.com has reported takeover rumors on BIDU as early as August, 2005. Throughout the entire year BIDU takeover rumors have circulated, but they specifically picked up steam in early June, and lost it after GOOG sold their position in mid June. In August and September, takeover rumors circulated again.
In the past, BIDU has been rumored as a GOOG (most prominently) or YHOO takeover target. There have also been rumors of an LBO (leveraged buyout) on BIDU, and that several firms may have started to make a move.

Analysis of the Rumors
In June, BIDU had over $1B in cash, and today has a market cap of only $2.8B. A company that has roughly 35% of its market cap in cash could definitely be a target of a LBO.

An acquisition of BIDU has the feel of “Buying your own Google”:

China is an important market for internet based companies, as internet access and use is growing exponentially (with growth of at least 41% since 2003). In 2005 China had 111 million internet users (source). By 2010, China is predicted to have more than 250 million internet users (source). The United States in 2005 only had 200 million internet users (source).

Search engines are at an early stage in China, as the Chinese access to the internet has been limited and controlled. However, BIDU has been dominating that market.In 2005, BIDU had 46.5% of the Chinese search market share. In 2006, it is estimated that they control now well over 60% of the search market share in China.

Some cite the nuances of the market – which it appears BIDU understands – along with greater support from the Chinese government to be the difference.

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Google (NASDAQ:GOOG)
GOOG currently has a P/E of 60, has roughly $10B in cash and a market cap of $146B. GOOG completed the $1.6B acquisition of YouTube entirely in stock, so their cash reserves weren’t at all depleted. GOOG still needs to spend some of its cash, and rumors of a takeover of YHOO and BIDU have been prevalent recently.

Google has had trouble picking up market share in China for internet search. In 2005, GOOG had only 26.9%. It is estimated that in 2006, GOOG will only have between 20% and 25%. In other words, Google is losing market share in China to Baidu. By acquiring BIDU, Google would increase its market share in China to over 75% - definitely very tempting.

Important Note on Google’s possible interest in Baidu: Earlier this year, GOOG had a significant stake in BIDU, but sold it in mid June, signaling that they were not interested in an acquisition of BIDU at the time.

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Yahoo (NASDAQ:YHOO)
Yahoo has had even more difficulty picking up market share in China than Google, with less than 16% of the market -- and even that it is losing slowly. With a market cap of $36B and cash reserves of $2B, YHOO could probably get the growth that its investors are demanding by acquiring BIDU. YHOO has not posted stellar growth in the past and has recently maintained a low P/E of around 25.

If YHOO were to acquire BIDU, their market share would more than quadruple to almost 80% in China, significantly overtaking GOOG – which would most likely excite investors.

.......

As BIDU continues to gain market share in China without a significant increase in the P/E ratio (and with the recent decrease), BIDU has become and is becoming an increasingly attractive takeover target to anyone interested in the Chinese search market.

BIDU 1-yr chart:

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Source: Baidu Takeover Rumors: What Google and Yahoo Would Gain