Coffina: Baidu Should Reject Insider Offer For Video Site
In open letter to the Baidu CEO and Board, shareholder and StockInvestor Editor Matt Coffina spells out his objections to a proposed sale of video platform iQiyi.
On Feb. 12, 2016, Chinese search engine
Morningstar StockInvestor
owns Baidu in its real-money Hare portfolio, and
StockInvestor
editor Matt Coffina weighed in with the following message to the CEO and the independent directors.
An open letter to the CEO and independent directors of Baidu Inc.
To: Messrs. Penner, Callinicos, and Ding, and CEO Robin Li,
I am a long-time Baidu shareholder, both personally and professionally. BIDU was the first stock I bought when I became editor of the Morningstar StockInvestor newsletter, and I have used the newsletter to express my steadfast support for your efforts since then, including through the heavy investment spending and margin contraction of the past several years. I remain a firm believer in the long-run potential of your business.
However, I was severely disappointed with the recent proposal by Messrs. Li and Gong to acquire Baidu’s leading online video asset, iQiyi. I urge Robin Li to withdraw his proposal, and the independent directors to reject the offer. I do not believe such a transaction would be in the long-run interests of Baidu shareholders for the following reasons:
- I expect that iQiyi's own prospects will also be hurt by this transaction, since the company will lose access to Baidu's enormous cash flow. IQiyi was a 5.4 percentage point drag on Baidu's non-GAAP operating margin in the third quarter, implying run-rate operating losses of more than $150 million per quarter. Without access to Baidu's cash, iQiyi would have to fund these losses externally, diluting shareholders and impairing its ability to compete for the highest-quality video content.
- Lastly, iQiyi's impact on Baidu's operating profit is dwarfed by that of the O2O investments, which were a 32 percentage point drag on Baidu's non-GAAP operating margin in the third quarter. If maximizing reported profitability is your goal, then Baidu should prioritize finding a new home for O2O—such as a combination with Meituan, similar to the recent deal with Ctrip—rather than divesting iQiyi.