Microsoft-Yahoo Deal May Benefit Alibaba.com But Hurt Baidu

HONG KONG -(Dow Jones)- A Microsoft-Yahoo combination may benefit Hong Kong- listed Alibaba.com (1688.HK) but could heighten competition for China's leading search engine Baidu.com Inc. (BIDU), analysts said.
Last Friday, Microsoft Corp. (MSFT) unveiled an offer to buy Yahoo! Inc. ( YHOO) for $44.6 billion, a move designed to create a more credible competitor to industry leader Google Inc. (GOOG) and deepen Microsoft's position in the market for online business software. "Who would be the biggest winner? The Alibaba Group. Who would be the biggest loser? Baidu," Citigroup analyst Jason Brueschke wrote in a Monday report.
Yahoo owns 39% of Alibaba Group, the parent of Alibaba.com, which provides e- commerce to small and medium-sized enterprises in China and globally.
"Baidu provides search monetization services for Microsoft's MSN China properties. We assume that Microsoft might, if a transaction proceeds, switch this contract to the Yahoo-invested Alibaba group and estimate that the negative impact on Baidu's net revenue could be in the very low single digit percentages, " Goldman Sachs said in a report Monday.
Deutsche Bank analyst Alan Hellawell said a Microsoft-Yahoo combination would create a more aggressive advertising syndication network in China which could present more competition for Baidu.
"We believe Alibaba.com and its unlisted group peers may offer the combined Microsoft/Yahoo entity the best leverage in achieving a previously largely elusive foothold in the China market," he said.
Shares in Alibaba.com surged in early morning trade in Hong Kong as investors weighed in on the potential benefits a Microsoft-Yahoo deal could bring the company. At the midday break, its shares were up 17% at HK$20.95. Shares in Baidu, which are listed on Nasdaq, closed Friday's session, down 3.7% at US$ 269.59.
Alibaba.com spokeswoman Sovanna Fung declined to comment. Baidu officials weren't immediately available for comment.
But some analysts downplayed any negative impact a Microsoft-Yahoo deal might bring to Baidu, given the company's dominant market share in China.
BNP Paribas Asia Securities analyst Eric Wen said while a Microsoft-Yahoo combination could increase competition in China's Internet search engine market, it won't change Baidu's dominance.
"I think the deal should only have little impact on Baidu's traffic and revenue. It's difficult for Microsoft and Yahoo to challenge Baidu's leading position," said Wen, who rates Baidu a "buy" and has a price target of US$480.
According to market research firm Analysys International, Baidu's share of the search market in China as measured by revenue was 60.1% in the fourth quarter of 2007. Google came in second place with 25.9%, while Yahoo China was third with 9.6% of the market.
Some analysts also said Hong Kong-listed Tencent Holdings Ltd. (0700.HK) and Nasdaq-listed Netease.com Inc. (NTES) might see increased competition.
"If Alibaba Group were to take operational control of Microsoft's China assets (MSN, Hotmail), then we could see some increased competition due to better execution by Alibaba," said Citigroup's Brueschke.
According to Citigroup, Microsoft's Windows Live Messenger ranks number two in instant messaging in China to Tencent's QQ, which is number one with 75%. NetEase is the dominant provider in e-mail.
Brueschke also said Microsoft's stake in the social networking site, Facebook, could affect social networking in China where Tencent dominates.
Tencent shares are up 5.7% at HK$50.15 at the midday break.