BEIJING Qihoo 360 Technology Co (QIHU.N) said it is in early talks with Sohu.com Inc (SOHU.O) to buy its Sogou search engine, a deal estimated to be worth up to $1.4 billion and which would help the upstart command a quarter of China's search market.
Qihoo, a $7 billion U.S.-listed company, broke onto the scene last year and has rapidly eaten away at industry leader Baidu Inc's (BIDU.O) dominance to become the country's No.2 search engine firm with a 15 percent share.
M&A is heating up in China's Internet industry, with deals increasing in value as the sector furiously chases ways to make money off mobile platforms.
Baidu, which has 69 percent of the search engine market, said this week it plans to acquire the 91 Wireless app store from NetDragon Websoft Inc (0777.HK) for $1.9 billion, in a bid to beef up its mobile presence.
But Qihoo stressed that the negotiations are still preliminary.
"Right now we're not in the pricing stage yet. We're still trying to figure out a way whether we can get this piece of asset and fully integrate it," said Alex Xu, the company's co-chief financial officer, in a telephone interview with Reuters.
Any deal would be mostly funded with Qihoo equity with a smaller portion funded by cash, he added. Qihoo reported $301 million of cash and cash equivalents at the end of March.
Analysts have estimated Sogou's search engine business could be worth between $1.2 billion and $1.4 billion.
"I think it's a good buy for Qihoo, they can increase the market share a lot faster through M&A," said Elinor Leung, an analyst at Hong Kong brokerage CLSA.
China's mobile Internet market is expected to double to about 300 billion yuan ($48 billion) in 2014 from 150 billion yuan in 2012, according to Analysys International.
The number of Internet users in China was some 591 million people in June, up 41 percent from three years ago.
Shares in Qihoo have risen 92 percent since the beginning of the year.
(Editing by Edwina Gibbs)