Qihoo Reorganizes, Zhou To Head Wireless

| About: QIHOO 360 (QIHU)

Software security specialist Qihoo 360 (NYSE:QIHU) has become the latest Chinese web firm to launch a major reorganization lately, joining names like Alibaba, Tencent (OTCPK:TCEHY) and Baidu (NASDAQ:BIDU) in trying to rationalize companies whose rapid growth in the last 5 years has made them unwieldy and sometimes chaotic. This wave of reorganizations reflects the fact that these Internet giants of today look quite different from the companies they were just 5 or 6 years ago. Nearly all the big names have entered numerous new areas outside their original core businesses, even though most lacked the corporate structure to integrate so many different units.

From an observer’s perspective, this wave of reorganizations looks both encouraging but also a little worrisome. It’s encouraging that these companies realize they have become too big and require new structures to try and improve the efficiency of their operations. But it’s also a bit alarming, since such restructurings represent an admission of chaos and lack of efficiency inside many of these companies due to their recent rapid growth. Such major overhauls are also quite difficult to execute well.

Qihoo reflects the larger group, both in terms of the its size and business. The company’s shares have risen more than 5-fold over the last 12 months, with its market value now just under $10 billion. It has also expanded rapidly outside its original business of making security software for PCs. Most notably, it entered the online search business last year, and has rapidly picked up market share on industry leader Baidu. At the same time, the company is making a major push into the mobile business, mimicking moves by most of China’s other major Internet companies.

With so many new businesses and initiatives on its radar screen, it’s not surprising to learn that the company has recently undergone a major restructuring that has seen it separate itself into 2 broad areas, one focused on products and services for traditional desktop PCs and the other on wireless. (English article; Chinese article) As part of the overhaul, the company’s controversial founder Zhou Hongyi will personally assume control of the wireless part of the business.

Industry watchers will recall that Alibaba, Tencent and Baidu have all undergone major similar restructurings over the past 2 years. In Baidu’s case, founder Robin Li personally took over the head of the company’s wireless business, in a move that looks almost identical to Qihoo’s. (previous post) In Alibaba’s case, founder Jack Ma also formally stepped aside as head of day-to-day operations by naming a new CEO, and said he would focus on broader strategic initiatives in the future like mobile and social network.

Qihoo is a bit later than the other companies in launching its overhaul, though the company’s growth has also come a bit later than the others. Zhou’s decision to focus on mobile looks like a good move, as the mobile Internet is clearly a major trend as a growing number of Chinese access the web over their smartphones. Like Jack Ma and Robin Li, I have no doubt that Zhou will remain very active in his company and will also remain a controversial character for aggressive business tactics.

So, what do I think of this overhaul for Qihoo? The timing does seem quite good, as Qihoo is making this move much earlier than Baidu, Alibaba and Tencent, which were all much bigger and had many more businesses when they launched their reorganizations. Thus the overhaul, if executed well, could position Qihoo to function more efficiently in the future if and when its fast-growing search business starts to earn some major revenue. The major potential downside for the company will be Zhou himself, as this controversial figure’s fondness for confrontation and pushing boundaries could ultimately land both him and Qihoo in legal or regulatory trouble.

Bottom line: Qihoo’s reorganization looks well timed and could position the company to operate more efficiently as it enters a new high-growth period.

Disclosure: None.

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