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Reasons For Going Long On QIHOO 360 Technology Co. Ltd

|Includes: QIHOO 360 Technology Co. Ltd. (QIHU)

Elevator Pitch

With the privatization still more likely to happen than not, current Qihu price is at a discount and will likely reward patient investors.

Buyout details QIHOO 360 Technology Co. Ltd. (NYSE:QIHU)

About the buyout:

Qihu received a preliminary non-binding proposal letter, dated June 17, 2015, from Mr. Hongyi Zhou, chairman and chief executive officer of the Company, CITIC Securities Co. Ltd. or its affiliates, Golden Brick Capital Private Equity Fund I L.P., China Renaissance Holdings Limited or its affiliates and Sequoia Capital China I, L.P. and/or its affiliates.

Reasons why the buyout will likely to happen

Money reasons:

Over 95% YoY jump in Shenzhen/Shanghai's stock index has given technology companies listed there a hefty valuation with P/E in the 3 figure range. Qihu on the other hand feels under-appreciated and sometimes misunderstood by the foreign market(According to CEO internal email).

Business reasons:

Qihoo's founder and CEO, Zhou Hongyi has said on his weibo account that he's more of a product owner/manager than a CEO. After the joint venture with Coolpad, he's been working mostly as the lead of Qiku on the phone that is scheduled to release this summer. Qi Xiangdong has been managing the other part of Qihu's business. It is clear Qihu's privatization is not only a move to gain more traction on the capital side, it is also a way to help them move towards a functional split. So far, speculations is that Qi will take over the security and PC end of things while Zhou HongYi will manage mobile and IoT.

Also, after the privatization deal was announced, an internal email went out from the CEO, Zhou HongYi, stating(as a rough translation) "Privatization of 360 is not only a capital operation; it'll push 360 into the next chapter of growth". It is clear that the vision has been set within the company and privatization is a necesasry part of it. As some of you already know, the two founders, Zhou Hongyi, and Qi Xiangdong, owns about 24% of Qihoo's outstanding share, and around 57% of the voting power.

Third, Looking at the list of parties behind this:

  • CITIC Securities is one of the largest, if not the largest investment bank in China in terms of revenue/profit. It is state owned. Because the swift changes in Chinese government's push towards rewarding technology driven investment, investing into Qihoo will be a good opportunity for CITIC to align with the country's vision.
  • Sequoia Capital is probably one of the most well known silicon valley investment firm. The long list of companies Sequoia has invested includes Google, Cisco, Linkedin, Whatsapp and many of the biggest and hottest technology firms out there.
  • China Renaissance has been one of the more active players in fund raising, investing and advising IPOs in China. For those who are not as familiar with them, www.huaxing.com/en/about1/

Lastly, Qihu penetrated the Chinese internet field with its free anti-virus software for personal use. Starting last year, the Chinese government has emphasised multiple times on network security; due to it's leadership in the field, Qihu already started it's enterprise security software business. It is likely that in order succeed in that field, the company needs to be locally owned and listed locally as well, for national security reasons.

Core business

  • Search Engine business(desktop and mobile), competing with Baidu
  • Internet add-on business(360 portal, web games), competing with major internet ports and web game devs
  • Cellphone(software and hardware) business, JV with coolpad, competing with Huawei, Xiaomi, LeTV and others, it'll not be in the price range of high-end Samsungs and iPhone.
  • IoTs
  • 360 Android marketplace

Risks

Privatization falling apart would be the most obvious risk presented, there are a few cases where the deal might not happen

  • Chinese government keeps locking IPO for the forseeable future, making it hard for Qihu to go back to Shanghai and re-listing.
  • Sheer size of the buyout($10 Billion, largest in Chinese company) might be a problem for funds.
  • Their cellphone that is getting released in the near future turn out to be a bust and Zhou changes his mind about splitting the business up.

Valuation

Privatization deal at $77 per ADS, price target at $77 a share, indicating a ~22% increase from the most current price.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QIHU, CQQQ over the next 72 hours.