Revisiting rumors of Yahoo! or Google buying Baidu

Baidu.com Inc. (NASDAQ:BIDU) is the leading Chinese Internet search engine. Baidu holds over 62% of the search market in China. Today (overnight Chinese time), Baidu reported third-quarter financial results with profits rising sharply. Net income was $10.8 million, or 31 cents a share, up more than 900% from the same period last year, on revenues of $30.3 million, a 169% increase. However, like most companies that lowered forward estimates, BIDU stock price fell today closing down 2.83% to $84.81.

This was a good time for StockRumors.com to revisit rumors of a possible buy out by Google, Inc. (NASDAQ:GOOG) or Yahoo!, Inc. (NASDAQ:YHOO), including a possible LBO given Baidu's large cash reserve.

As I mentioned above, Baidu holds 62% of the growing Chinese Internet search. The growth rate of Chinese Internet users is faster and also has a greater potential than that of the U.S. market. While the U.S. already has 200 million Internet users, there are only 110 million users in China, a number that is expected to more than double by 2010. Naturally, the company that would manage to capture that market would do well.

For Google, this would be weird. Back in June, Google has sold its 2.6% stake in Baidu. Don't get me wrong, Google could buy Baidu, it's got the resources (market cap and cash reserves) even after the purchase of YouTube for $1.6 billion. Buying Baidu would immediately increase Google's Chinese market share from 23% (and falling) to a stronghold in this growing market.

For Yahoo!, the acquisition would make a lot more sense. After its latest financial results, Yahoo! needs to re-accelerate growth and fast. Yahoo!'s current share in China is less than 12% so with Baidu it would make it over 70%. Very attractive. However, Yahoo!'s market cap and cash reserves are much lower than that of Google's and should there be a bidding war, this might present a problem for Yahoo!.

The question is the price that would (should) be paid for Baidu. Baidu's current market cap is $2.8 billion but I would assume that despite the current high P/E ratio, a premium might still be attached given Baidu's growth rate and potential.