Baidu Valuation at IPO
Baidu
CASE: A-197 DATE: 02/05/09
BAIDU.COM, INC.: VALUATION AT IPO
Since its official launch in January 2000, Baidu.com, Inc. (Baidu) quickly grew to become the leading Internet search engine in China. After three rounds of private funding, Baidu registered to go public on the NASDAQ Stock Market (Ticker Symbol: BIDU) on August 5, 2005. (See Exhibits 1 and 2 for a listing of Baidu’s private funding sources and pre-IPO share allocations.) The initial public offering (IPO) turned out to be one of the highest-profile debuts since the Internet bubble burst in 2000. The stock price jumped 354 percent on the first day of trading and closed at $122.54, valuing the company at about $3.96 billion based on 32.3 million shares outstanding. While the market showed strong enthusiasm for the stock, Baidu’s public offering nevertheless generated much debate in the investment community about the underlying value of the firm. Furthermore, concerns were raised about whether or not Baidu was able to sustain its growth rate and exceed investor expectations after the IPO. Factors leading to this uncertainty included: the state of the Internet-paid search market in China, the expected growth in the marketplace, the competitive landscape, and the strength of Baidu’s business model and strategic position. BACKGROUND ON CHINA’S ADVERTISING AND ONLINE ADVERTISING MARKETS Advertising Market From 1995 to 2005 China’s advertising market grew at a compounded annual growth rate (CAGR) of 17 percent, which was substantially higher than China’s nominal annual GDP growth rate of 11 percent over the same period. China’s strong economic growth had resulted in increased demand for products and services, both in business and consumer product categories. In 2005, the total advertising spend in China was approximately $10 billion, equivalent to 6 percent of the U.S. market. Though still a small market compared to the U.S., China’s
Jennie Tung and Sara Gaviser Leslie prepared this case under the
CASE: A-197 DATE: 02/05/09
BAIDU.COM, INC.: VALUATION AT IPO
Since its official launch in January 2000, Baidu.com, Inc. (Baidu) quickly grew to become the leading Internet search engine in China. After three rounds of private funding, Baidu registered to go public on the NASDAQ Stock Market (Ticker Symbol: BIDU) on August 5, 2005. (See Exhibits 1 and 2 for a listing of Baidu’s private funding sources and pre-IPO share allocations.) The initial public offering (IPO) turned out to be one of the highest-profile debuts since the Internet bubble burst in 2000. The stock price jumped 354 percent on the first day of trading and closed at $122.54, valuing the company at about $3.96 billion based on 32.3 million shares outstanding. While the market showed strong enthusiasm for the stock, Baidu’s public offering nevertheless generated much debate in the investment community about the underlying value of the firm. Furthermore, concerns were raised about whether or not Baidu was able to sustain its growth rate and exceed investor expectations after the IPO. Factors leading to this uncertainty included: the state of the Internet-paid search market in China, the expected growth in the marketplace, the competitive landscape, and the strength of Baidu’s business model and strategic position. BACKGROUND ON CHINA’S ADVERTISING AND ONLINE ADVERTISING MARKETS Advertising Market From 1995 to 2005 China’s advertising market grew at a compounded annual growth rate (CAGR) of 17 percent, which was substantially higher than China’s nominal annual GDP growth rate of 11 percent over the same period. China’s strong economic growth had resulted in increased demand for products and services, both in business and consumer product categories. In 2005, the total advertising spend in China was approximately $10 billion, equivalent to 6 percent of the U.S. market. Though still a small market compared to the U.S., China’s
Jennie Tung and Sara Gaviser Leslie prepared this case under the