360 Privatization: Zhou Hongyi Dreams of the Top of the Internet

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The privatization of 360 has been planned for a long time. The news is announced now because Zhou Hongyi feels that the timing is right.

On June 17, Zhou Hongyi, Chairman and CEO of 360, announced that he would jointly make a non-binding privatization offer to 360 shareholders with CITIC Securities, BRICS Capital, China Renaissance Capital and Sequoia Capital, intending to acquire the shares held by other shareholders at a price of US$77.00 per ADS (corresponding to US$51.33 per Class A or Class B common share).

At present, the privatization of Qihoo 360 is still a "possibility". The Qihoo board of directors has not made any decision yet and does not promise that any transaction will be reached in the future.

As for why 360 was privatized, Zhou Hongyi explained in an internal email on the same day that 360's current market value of $8 billion does not fully reflect the company's value. After the announcement of this news, Qihoo's pre-market price surged to $74.06, an increase of 12.13%. 360's market value once exceeded $9 billion.

In an internal email, Zhou Hongyi said that privatization was a prudent decision made by him and Lao Qi (Qi Xiangdong) after repeated consideration of the current global and Chinese capital market environment.

Qihoo's announcement of delisting is not only related to Qihoo 360's valuation, but also to another thing: Zhou Hongyi's smartphone business. As early as last year, Zhou Hongyi has been less responsible for 360's traditional security business and has focused all his energy on smartphones. Qihoo 360 President Qi Xiangdong is in charge of the traditional security business.

There is a hidden message behind the previous announcement of delisting: 360's business will be split, the traditional security business will be split and listed domestically, and emerging businesses such as smartphones and smart hardware will be separated. The business split will bring about a result: Zhou Hongyi and Qi Xiangdong will be responsible for the division of labor, with Zhou Hongyi responsible for emerging businesses and Qi Xiangdong responsible for traditional businesses.

Privatization, domestic listing, business spin-off, and comprehensive division of labor are Qihoo 360's new chess game, which aims to preserve old businesses and develop emerging businesses.

For a period of time, smartphones were the highlight of Qihoo 360's emerging business. Recently, there has been a lot of news about Qihoo 360: on May 6, Qihoo 360 held a press conference to announce the launch of the mobile phone brand "Qiku" in cooperation with Yulong Coolpad; on May 27, Qihoo 360 announced the launch of the "Basic Application Crowdfunding Plan".

Sources revealed that Qihoo 360 will be launched in August, just in time for the summer promotion and the start of the new semester. By announcing privatization at this time, Zhou Hongyi will present Qihoo 360's future chess game to the world: two fronts to promote reform, one is privatization and domestic listing, and the other is business spin-off and management division adjustment.

It is no secret that 360 will spin off its traditional business and return to the domestic market. An insider of 360 revealed that Zhou Hongyi and Qi Xiangdong had reached a consensus on this matter at the end of last year, and the company had already started delisting and privatization operations last year, including cooperation with CITIC, Huaxin, Sequoia and other institutions.
Market value pain

Zhou Hongyi has always been impatient with the US capital market: Qihoo 360 has been frequently shorted by US short-selling institutions such as Muddy Waters and Citron, and analysts have questioned the company's unclear business model at its earnings conference. Zhou Hongyi once angrily accused the above-mentioned questioning of "not understanding the Chinese Internet".

Zhou Hongyi said in an internal email: Many of us (company employees) believe that 360's current market value of US$8 billion does not fully reflect 360's corporate value.

According to Zhou Hongyi's privatization offer, he intends to acquire the 360 ​​shares held by other shareholders at a price of US$77.00 per ADS (corresponding to US$51.33 per Class A or Class B common share), which is a 16.6% premium to 360's closing price on June 16, 2015, and a 32.7% premium to the arithmetic average of the closing prices of the past 30 trading days. The willingness of Sequoia Capital, CITIC Securities, China Renaissance Capital and other institutions to take over at a premium also shows their confidence in Qihoo 360's future business.

Data provided by Qihoo 360 shows that by the end of the first quarter of 2015, the total number of monthly active users of 360's PC and mobile products exceeded 1.2 billion; in 2014, the company's operating income was more than 8.6 billion yuan, and its net profit exceeded 2.1 billion yuan. At the end of 2014, the company's total assets reached 20.6 billion yuan, and its cash exceeded 10 billion yuan.

In the past few years, Qihoo 360 has occupied an absolute leading market share in the Chinese market for PC security products by relying on its free strategy. At the same time, it has entered the search and mobile application distribution fields and occupied a certain leading position. Since last year, it has also expanded its business to games, smart hardware and other fields.

For the above institutions, the greater temptation is the "money prospects" of 360's return to the A-share market: compared with Baofeng Video and LeTV, Qihoo 360's business revenue and profit scale are far ahead, but its market value is only slightly higher than Baofeng Video and lower than LeTV. As of June 18, 360's market value was about 8.7 billion US dollars, about 54 billion yuan, Baofeng Video was about 37 billion yuan, and LeTV was about 113.2 billion yuan. An investment banker analyzed to the author: 360's return to the A-share market, with a guaranteed minimum of 200 billion yuan, is expected to hit 300 billion yuan.

Zhou Hongyi feels that compared with A-share companies such as Baofeng Video and LeTV, Qihoo 360's stock price has been doubly discounted: the first discount is the U.S. capital market's lack of understanding of China's Internet, especially its lack of understanding of "portal" businesses like Qihoo 360; the second discount is the valuation difference between the Chinese capital market and the U.S. capital market.

What is the significance of a valuation of 300 billion yuan? 300 billion yuan is about 50 billion US dollars, and its market value is only behind Alibaba, Tencent, and Baidu. In terms of valuation, it is slightly higher than the valuation of Xiaomi's last round of financing (Xiaomi's last round of financing was 45 billion US dollars), at least in terms of market value, it has once again formed a TABLE pattern.

TABLE refers to five companies (or multiple companies formed around individuals), namely Baidu, Alibaba, Baidu, Lei Jun and Zhou Hongyi. At one time (in 2012), these five companies (individuals) were the companies with the largest market value (valuation) in China, and also the companies with the greatest influence. They stood at the pinnacle of China's Internet, and were looked up to by their peers.

In 2013, 360's market value began to decline, and Zhou Hongyi's entry into the TABLE was no longer in line with his reputation. In 2014, the industry mentioned TABL the most, and TABLE was rarely mentioned. Many people commented that when five people fight for the four sides of a table, one person is doomed to be eliminated. Now the competition is over, and Zhou Hongyi is the one who is eliminated.
Mobile phone dream

Sequoia Capital, the institution that took over 360, was an early investor in 360. Neil Shen, the founding and executive partner of Sequoia China, has been Zhou Hongyi's partner for many years. During the development of 360, the two had very fierce debates, such as the 3Q war and 360's free strategy. At first, Neil Shen was the most resolute opponent, and even argued in public. But when Neil Shen knew that Zhou Hongyi had made up his mind, he became the most staunch supporter.

One is the most distinctive person in China's Internet industry, and the other is the person with the strongest investment will in China. The two have been working together for more than ten years. This time was no exception: when Zhou Hongyi decided to privatize and return to the A-share market, Sequoia became a partner of Qihoo 360. Not only because of the expectation of making money, but also because of the fighting friendship between the two.

Zhou Hongyi and Shen Nanpeng actually both understand that even if 360's market value returns to its peak after privatization and returns to the domestic capital market, it will not be able to last long. For 360 to return to its peak, it depends on the success or failure of Qihoo 360 in emerging business areas: if it succeeds, it will be the king, and if it fails, it will be the bandit. The king will reach the pinnacle of China's Internet, and the bandit will be a second-rate Internet company.

An important result of the privatization and listing is financing. Zhou Hong revealed in an email that with an IPO market value of 100 billion yuan, the financing scale can reach 20 billion yuan. Currently, 360 has assets of more than 20 billion yuan and cash of more than 10 billion yuan. After the listing, the company's cash reserves can reach 30 billion yuan, which can provide blood transfusion for emerging businesses such as mobile phones.

Regarding the new business layout, Zhou Hongyi said in an email: 360 Company has become one of the strongest competitors in China's smart hardware field.

Zhou Hongyi said that 360 Company not only announced a strategic alliance with Coolpad, established Qihoo Technology to enter the mobile phone industry, and launched two mobile phone brands, Qihoo and Dasheng, to the market, but also launched a series of innovative smart hardware products such as children's smart watches, routers, smart cameras, driving recorders, etc., becoming a leader in the relevant market.

Zhou Hongyi said, "With 360's existing outstanding performance and capabilities, we have full autonomy to make choices."

Zhou Hongyi believes that the privatization of 360 is not only a capital operation, but also an important boost for 360 to enter a new stage of development. It will inject huge impetus into the current comprehensive strategic upgrade and leapfrog development, and at the same time provide more opportunities and a bigger stage for passionate 360 ​​employees.

The fact is, 360's advantage in the field of smartphones is not obvious, especially in the backbone smartphone field: among Chinese companies, Xiaomi and Huawei are currently leading. In the Chinese market, Lenovo, BBK, Meizu and foreign companies such as Samsung rank ahead of 360. Qihoo 360 needs a transfusion from the capital market.
Comprehensive division of labor

The privatization and domestic listing were carried out simultaneously with the business split and the adjustment of the management structure. After the business split, Zhou Hongyi was responsible for the emerging businesses represented by smartphones, while Qi Xiangdong was responsible for security, 360 Mobile Assistant, 360 Search and other businesses. Zhou Hongyi was responsible for the new businesses that burned money, while Qi Xiangdong was responsible for the old businesses that made money.

Since last year, there have been rumors in the industry that Zhou Hongyi and Qi Xiangdong have "fallen out and are going to separate." A 360 insider said: The separation is a malicious interpretation of the outside world that the two will have a clear division of labor. The two will still work closely together. Qi Xiangdong, who makes money, needs Zhou Honghong to spend money to buy the future; Zhou Hongyi, who spends money, needs Qi Xiangdong, who makes money, to provide ammunition.

In terms of business division of labor, this will form a two-fist layout: Zhou Hongyi is the outgoing fist, responsible for offense; Qi Xiangdong is the retracted fist, responsible for defense.

The above-mentioned insider said: This is also in line with the personalities of the two people: Zhou Hongyi is not satisfied with the status quo, is aggressive and aggressive, and likes to attack; Qi Xiangdong is thoughtful and does not fight a battle without confidence. The personalities of the two people complement each other very well during the start-up period, Zhou Hongyi is responsible for external affairs, and Qi Xiangdong is responsible for internal affairs. However, if both of them are responsible for mature businesses and start to manage internal affairs, conflicts will arise. This is also the reason why the two people sometimes disagree in internal meetings, although the differences can be resolved in the end.

Zhou Hongyi needs a grassland to hunt like a wolf; Qi Xiangdong needs a garden to be a diligent gardener to make the flowers in the garden bloom better. In the view of 360 insiders: the division of labor between the two people through the split can not only realize the new business layout, but also resolve differences, which is a good thing to kill two birds with one stone.

Traditional businesses do not just need to be “maintained”, but also face a lot of room for expansion: last year, 360 began to enter the enterprise-level security business. Enterprise-level security business means that the user group of Qihoo 360's security business has changed: previously only individual consumers, but now also includes government agencies and enterprises.

This is also a new market for 360. More importantly, this market requires new ways of playing: in the personal consumer market, 360 is a latecomer. Its approach to subverting competitors such as Rising, Kingsoft, and Symantec is to offer free services. This strategy won the support of personal consumers who pursue cost-effectiveness, and 360 succeeded in one battle. But for corporate users, free means exemption from liability. If there is a security problem, the amount of compensation is related to the purchase amount. They do not have the confidence to entrust their security to a free company.

Lenovo Group CEO Yang Yuanqing said in an interview with the author: Fundamentally speaking, the personal consumer market is a transactional business, while corporate business and government business are relationship-based businesses. The core of relationship-based business is not cost-effectiveness, but trust, trust in product safety and stability.

Qi Xiangdong has the advantage of doing relationship business. In addition to his meticulous thinking and his character of not fighting without confidence, he also has many years of experience working in government agencies. In fact, when Qi Xiangdong joined 360, he was already a "bureau-level cadre". From 3721 to Yahoo China and finally to Qihoo, he has always been in charge of Qihoo 360's government relations.

In fact, because of the Snowden incident, the government lacks trust in foreign security products. Whether it is government agencies or large state-owned enterprises, they are required to use domestic security software and servers. Domestic security software faces a golden opportunity. Just like the wave in the server field, the market share has soared in the past two years, coupled with the A-share market, the company's stock price has also risen. This is also a good thing for 360 to return to the domestic market.

In the business layout, the business Zhou Hongyi is in charge of is more important because it represents the future. Qihoo 360's 2014 annual report shows that Zhou Hongyi holds about 31.31 million shares, accounting for 16.2% of the shares, and Qi Xiangdong holds 15.01 million shares, accounting for 7.8% of the shares. Compared with the 2013 annual report data, both Zhou Hongyi and Qi Xiangdong have reduced their holdings of 360 stocks. The above-mentioned investment banker said: The reduction in holdings may indicate a fact that Qihoo 360 will focus more on emerging businesses.