Now that the search alliance with Yahoo! (YHOO) is firmly in place, Microsoft (MSFT) should look elsewhere for search penetration, particularly in China, and look into the “long-term” possibility of acquiring Baidu (BIDU).
China is the fastest growing market for online search and holds the most promise in terms of incremental monetization potential. If Microsoft has serious intentions of taking global market share from Google (GOOG), then it needs to seriously consider BIDU, provided that Gates and Ballmer are undaunted by the censorship issue.
Baidu's search business has been performing remarkably well over the past year, with accelerating performance due in part to Google's de facto exit from the Chinese market. In the most recent quarter, revenues and profits were up ~80% and more than 100%, respectively.
Now, we are fully aware that an acquisition of what is essentially a Chinese media business by a foreign company may not be possible. In the near-term, however, a partnership may make sense until ownership restrictions ease.
Baidu's market capitalization stands at nearly $40 billion today, about equivalent to Microsoft's cash and investments balance.
Although Bing's search share has plateaued in the U.S., Microsoft has proven that it can be competitive, as Bing has turned out to be a very well designed approach to search. [Recall years back the Wall Street analyst reports touting 95-100% search share for Google in the U.S. It ain't gonna happen.] But, for now, MSFT should leave the acquisition talks with Yahoo! to the private equity companies (see write-up here), AOL, and NewsCorp (NWS), and focus on China where the future of search monetization lies. At the very least, it will not face stiff competition from Google.
As an aside, the median price target for BIDU shares from 11 brokerages is $115 and the average is $116, about $3-$4 up from the current trading range. Only two things happen from here. Brokerage firms will up price targets or downgrade the stock. Keep an eye out for either. The range of price targets is $66 to $140.
Good luck investing.