Baidu

M&G worked with the Chinese search engine giant to help them reconsider the sale of an important subsidiary.

About Baidu

Industry: Digital
Headquarters: Beijing, China

Baidu operates China’s largest internet search engine by both number of users and annual revenue, accounting for more than one-third of China’s online-ad spending.

Case study - BAIDU 

Engagement with Baidu

Baidu announced that it had received a proposal from the Baidu Chairman and Chief Executive Officer, to purchase its stake in iQiyi, an online video platform operating in China.
M&G wrote and met with the company to highlight the potential conflict of interest that this transaction could cause which contributed to the decision to stop the sale of the business.

Weighing up a new investment

An increasingly important part of our process when considering a new holding in Emerging Markets is a comprehensive assessment in the following key areas:

  • A thorough review of a company’s Environmental, Social and Governance (ESG) factors
  • A review of the board structure and voting rights
  • An assessment of the quality of accounting and related party transactions

Concerns in any of these areas can result in a decision not to invest as we believe that poor governance can have a material impact on a company’s performance and its share price.
We also continue to monitor ESG factors once we have invested which includes closely studying all proposed party transactions between the company and its executives and other shareholders.

Considering Baidu’s Proposal

In Baidu’s case, the business that was being sold to the CEO was heavily loss making which was a reasonable justification for the proposed sale.

However, we feared the deal would distract the attention of the CEO and were concerned that there was a lack of clarity about how the price was determined. We were also worried that iQiyi would continue to have ongoing links to the core business and this could present future conflicts of interest.

In addition to writing to the company and meeting the company’s CFO, we also raised our concerns to both other shareholders and the Asian Corporate Governance Association and encouraged them to contact the company on the transaction. Baidu subsequently announced that the proposal had been withdrawn. We believe this reflects well both on the company’s special committee that was established to consider the transaction and the company’s approach to external shareholders.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

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