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Baidu's Mobile Deal a Wise Move

NEW YORK ( TheStreet) -- Earlier this month, I wrote about the bullish prospects for Baidu (BIDU) as the company looks to focus more on the fast-growing mobile-device market in China.

The stock has since rallied more than 24%, propelled in large part by news this week that it has agreed to acquire app store developer 91 Wireless for $1.9 billion. The deal marks a move for Baidu beyond its traditional search businesses, and puts it in a better position to compete with rivals Tencent (TCEHY), Qihoo (QIHU) and Alibaba (ALBIY), which have recently completed big deals of their own.

The proposed acquisition of 91 Wireless bodes well for Baidu's stock long term as the company should gain more traction in China's mobile-device market. After the deal was announced, Baidu's stock rose to its highest levels in five months. Chinese are using mobile devices more, moving away from desktops.

Baidu has agreed to pay parent company NetDragon $1.09 billion for a 57.4% stake in 91 Wireless, and $800 million to the holders of the remaining 42.6%. NetDragon's mobile revenue rose more than three times to $23.5 million in the first quarter.

91 Wireless, which offers the HiMarket and 91 Assistant apps for Google's (GOOG) Android operating system, is the central component of NetDragon's business

NetDragon's latest earnings report shows that the HiMarket and 91 Assistant app stores have received more than 10 billion app downloads, and offer app development capabilities as well. With a 15.6% market share, Wireless 91 is No. 2 in app distribution in mainland China, behind Qihoo's Mobile Assistant (27.4% market share).

The Wireless 91 purchase gives Baidu another app download gateway for mobile devices, an area in which the company has been deficient compared with its Chinese competitors. Baidu controls 82% of the desktop search traffic in China, but the company's mobile search app accounts for only 9% of the search activity conducted by wireless customers in China. Baidu had to do something in mobile.

Without the 91 Wireless purchase, Baidu would have no way to secure a leading position in the mobile app store sector. The deal helps reinforce the company's position as a lead landing page for Chinese Internet users, and gives it the opportunity to build on its already strong position in search and map applications.

The purchase is the latest in a series of acquisitions in the Chinese Internet sector. Alibaba has agreed to buy an 18% stake in Weibo (the "Chinese Twitter") from Sina Corp. (SINA) and Baidu in May bought online video company PPStream for $370 million.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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