What is Baidu Going to Do with One Billion Dollar Bonds?

Recently, Baidu has announced to issue 1 billion five year bonds with a 2.75% coupon rate. Baidu declared that the money from the sell will be used for general corporation purposes. In November 2012 and July 2013, Baidu has separately issued bonds of 1.5 billion dollars and 1 billion dollars. Yet in less than a year, it issued 1 billion again. What is it up to?

Direct Financial Target

The Q1 earnings report of Baidu revealed its currency and short-term investments at a total of 6.38 billion dollars, payable notes of 2.48 billion dollars, and long-term loans of 0.35 billion dollars. The currency flow Baidu is controlling is close to 4 billion dollars, enough to buy most of the listed internet companies in China. The expectation of Baidu on its Q2 earning is 12 billion RMB, the estimated profit is more than 0.5 billion dollars. If so, why is this rich redneck borrowing so much money?

The direct aim is to raise capitals. Bond is an easier and faster way than stocks in raising money, and it costs less than bank loans. To some unlisted companies, issuing bonds is a core way of supplementing large amounts of money. After Alibaba withdrew from the stock market in 2012, it bought back the Yahoo share and paid loans by raising 4 billion dollars in the bond market in addition to what it has borrowed from banks.

The money from raising capitals always goes to fixed assets investment, technology upgrading, capital resource reconstruction, company assets reconstruction, and financial cost and debt reduction. Issuing bonds even serves as some kind of reverse investment. How many of the 2.48 payable notes are oversea is unknown. The income of Baidu is almost all in RMB. It is best to pay the oversea debts, possible shareholder dividends, and oversea investments for further business development by issuing dollar bonds.

Indirect Business Layout

There is no company that is absolutely in no shortage of money. Google, who has 60 billion cash in hand, issued 1 billion bonds in February only to increase its financial flexibility. Tencent also issued 2.5 billion bonds in April. If Alibaba could not go on the list at August 8 this year, a bond issuing will be a sure thing.

With more cash, a corporation might be planning a large-scale business expansion, infrastructure, or a merge. The steps taken by Baidu, Tencent and Alibaba after their bond issued proved this point. Baidu will certainly accelerate its pace in the following fields:

1. Supporting International Expansion with Dollars

Rick Munarriz, the senior analyst of Fool, an American investment website, thinks that the reason for the bond issuing of Baidu this time is oversea expansion. Exploring oversea market, or investing oversea companies, requires cash in dollar.

Baidu has never given up oversea expansion plans, especially when Alibaba, Tencent, or even Jingdong are marching onto the oversea market. Currently, the number of oversea users of Baidu reaches a mere 30 million — basically nothing compared to the domestic data of 0.5 million.

Besides Japanese web search, Hao123, Simeji input method, Baidu has also taken inroads such as the African mobile browser, the Thai security software, and the website navigation to the international market. Li Yanhong is keeping a low profile this time, though. The international business of Baidu has become its submarine.

An exception is recruiting and R&D. Not long ago, Baidu hired Wu Enda and set up a silicon valley lab. Li was there in person. If Baidu is going to march on to the fields of pilotless automobile, Google Glass, Virtual Reality and so on, it has to relate itself to the American market. Investing oversea companies, exploring oversea markets, establishing R&D centers, recruiting oversea top talents… all of these crave dollars.

2. Catalyzing Massive Domestic Merge

After buying 91 wireless with 1.9 billion dollars and a leveraged buyout of Nuomi, Baidu has not yet invested in any case over 0.1 billiion dollars.

Baidu is not in short of money. It is true that it prefers stock control or buyout, which requires more cash. But with over 5 billion dollars of cash reserve, it is able to purchase most of the listed internet companies, or a good amount of shares of companies like Jingdong and 360. However, it is unlikely that Baidu will spend all that it has, for most of its investments are long-term, including Qunar, iQIYI and Nuomi. It has to guarantee enough cash storage after another massive investment – which leads to supplementing the storage before a big investment.

If so, what are the choices Baidu have in investment? One thing to know is that, for Baidu, there’s always someone waiting to sell.

a. Entities: Baidu is taking inroads to the travel, education, health and finance industry. It is also pushing O2O business by Baidu map and Baidu wallet. This year, Li Yanhong also mentioned e-business software and new data market. This enlarges the scale of its potential investment object.

b. Internet: Baidu has many investment choices in the internet industry, such as Xiecheng and Renren. The merge of Xiecheng and Qunar went through twists and turns. With market values of 7.8 billion dollars and 2.7 billion dollars, huge expenses will be generated if share re-purchase is going to happen. The selling of Renren, however, is inevitable. Renren has what Baidu needs, namely the account system and social network. If Baidu is willing to take Renren, the price will be 1 billion dollars. Besides travelling and social media, there are also potential targets in gaming and publishing.

c. Hardware: Baidu wants to be the Chinese internet tycoon in hardware. It has done a few “small” investment, such as Haimou Tech and One Hundred Percent Mobile Phone. If it keeps this way, Baidu will probably corporate with mobile phone manufacturers such as Xiaomi and Meizu, or household appliance manufacturers such as Gree and TCL. As a matter of fact, Xiaomi and Baidu are becoming closer than ever. Since Lei Jun has a personal relationship with Li Yanhong, it is not surprising that Li uses Xiaomi mobile phone, invites Lei to Baidu for a visit, and corporate with Xiaomi to purchase stocks of Leopard Mobile. The estimation of Xiaomi’s value has reached multi-billion dollars. At the same time, Meizu is also looking for investors after Huang Zhang has returned to the battlefield.

3. Supporting Potential Business

The “arms race” between Tencent and Alibaba costs billions of dollars for both sides. Baidu wasn’t a part of it, but it will not be long before it join the O2O and mobile payment battle. At March 7 and May 17, Baidu spent hundred millions to heat up sale festivals in order to compete with Alibaba and Meituan. Recently, Baidu cooperated with China Unicom and Fuguo Fund to launch an internet money management and local life service business called “Wo Bai Fu”. These market behaviors require support of capitals.

One more important business of Baidu finance is small loans for the corporations. Baidu once joined capital with Jingdong to establish a small loan company in Shanghai. Meanwhile, it launches its own small loan business. The loaning business needs huge financial support, which will be beneficial for Baidu if the money comes from the low interest rate bond issuing.

The high potential video business means huge bandwidth costs. Baidu video, Baidu iQIYI and Baidu Yingbang will be needing a large amount of investment when they are trying to win the battle. Cloud calculation and big data, on the other hand, are long-term investments, which requires fixed asset costs and R&D costs at the early stage. The percentage of R&D costs raises every year in Baidu, and it will continue to raise in the future.

Baidu Bonds Favored by the Market

To judge corporation bonds, there are several indexes: duration, yields and subscription. Only companies that can raise confidence in the market could issue bonds frequently or issue long-term bonds. Even with a lower interest rate, the bonds are always over-subscripted or even snapped up.

Apple raised 17 billion dollars last year, with a ten year bond of a 2.415% yield, merely 75.5 percent higher than the U.S. Treasury Bond. Baidu enjoyed the same privilege as Apple. It was heatedly pursuit by the Wall Street, with a low interest margin and subscription capital several times of the issuing scale. Before the issuing of Baidu bonds, the market response is that the price could not go below 140 percent above U.S. Treasury Bond, but the final price is only 125 percent higher, with an interest rate of 2.75%. It is lower than the rate of the five year bond which Tencent issued one month earlier. After the issuing, Moody kept an A3 grading for Baidu, and Fitch Ratings rated “A (EXP)” for Baidu bond. The capital market, as well as investment corporations, are positive of Baidu’s performance in the next five years.

Conclusion

The extra 1 billion dollars in Baidu’s possession is not a direct cause or a necessity for the company’s massive merge or international expansion, but it will become a pusher and an arsenal for Baidu in its coming battle. As we can foresee, the competition among internet tycoons are just about to get fiercer.