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You could say that Beijing’s Baidu.com Inc., the little search engine that could, exploded onto the Nasdaq on Friday. The $108 million initial public offering wasn’t as big as Google Inc.’s and Baidu’s revenue isn’t anywhere near that of its Mountain View, Calif., Web rival. Baidu’s not even the top search engine in China. But its initial public offering generated just about as much buzz as Google’s did. Which probably accounted for its stock leaping 354 percent to close at $122.54 in first-day trading on Friday. Baidu, which was up more than 363 percent at one point in midday trading priced 4 million American Depositary Shares at $27 apiece, well above an already increased range of $23 to $25.3 Google’s shares sold for $85 in its $1.67 billion IPO and they rose just 18 percent in its first day of trading in August 2004. It now has a market value of around $81.8 billion. Baidu, which earned $1.8 million on revenue of $13.6 million during the first half this year, has a market value of about $856 million, at $27 a share. Just two days before its debut, demand for Baidu’s relatively small offering pushed the number of ADSs up from 3.7 million and bumped the price range up to $21 from $19. Each ADS represents one Class A ordinary share, with holders entitled to one vote a share. Pre-IPO stockholders possess all of the 10-vote-per-share Class Bs. While folks in middle America may not have heard of Baidu, which means “one hundred times,” millions in China have because it is the second-ranked search engine there. Even Google has taken notice, putting $5 million into Baidu in June for a 2.6 percent stake. Speculation has been ripe since Google made the investment that it might follow the lead of Yahoo Inc.’s expansion through acquisition strategy in China by buying all of Baidu. However, neither Google nor Baidu has confirmed any likelihood of a merger. And as part of the Baidu IPO, Google has agreed to an extensive lock-up period of two years for its stock, six months longer than for other Baidu investors. Baidu’s two largest shareholders are Redwood City, Calif.-based Draper Fisher Jurvetson ePlanet Ventures LP, which holds 25.3 percent, and founder and CEO Robin Li, with 22.4 percent. Li, who received his master’s degree in computer science from the University at Buffalo in 1994, should be able to pay off his student loans with the $6.8 million he pulled in from the IPO. He put up 250,000 shares in the offering, with other selling stockholders putting up another 581,706 shares. Draper Fisher did not sell any shares in the IPO. Without a combination with Google, the 6-year-old Baidu would face rising competition, not just from industry rivals, but from Google, too. Google recently received a license from Beijing allowing it to capitalize on growing traffic to its Chinese-language Web site. Baidu is also being challenged by other Chinese-language Internet portals, among them Yahoo and three Chinese companies, Sina.com, Sohu.com Inc. and NetEase.com Inc. Sohu started out as a search engine before diversifying into a general information services provider. Yahoo has won a substantial Web following in China after paying $120 million in cash in November 2003 to buy China’s second-largest search engine company, 3721 Network Software Co., from San Francisco-based International Data Group and Tokyo’s Jafco Co. Ltd. But none have yet rivaled Baidu’s popularity and its technological language sophistication and relevance with Chinese Internet users, who use Baidu mainly for finding information rather than buying merchandise. But that’s probably going to change. “Competition is going to be intensifying,” said Frank Shi, a Hong Kong-based analyst with CLSA Ltd. He said growth of the fledgling Chinese online search market will hinge on how quickly companies such as Baidu win wide acceptance from corporate users as a viable advertising venue. And also by how soon Chinese Internet surfers begin paying for merchandise online in the absence of a reliable payment system. Lawsuits could also loom for Baidu, with the company and Yahoo!’s 3721 unit hurling unfair competition charges at each other for the past seven months. Baidu may also face copy infringement complaints from the Beijing studio behind Jet Li’s “House of Flying Daggers,” as well as from a Shanghai music company. Baidu, which trades as BIDU, will put its IPO proceeds into research and development, expanding its customer base and general corporate purposes. Underwriters Goldman Sachs (Asia) LLC, Credit Suisse First Boston and Piper Jaffray & Co. have an option to buy an extra 481,304 ADSs from Baidu and an additional 82,518 ADSs from selling shareholders. Several trans-Pacific law firms worked on the offering, with Los Angeles-based Latham & Watkins advising Baidu on U.S. law and Maples and Calder helping out with Cayman Islands law. Baidu is incorporated in the Caymans. Beijing’s Commerce & Finance Law Offices is Baidu’s counsel in China, with East Associates advising on local patent laws. The underwriters turned to New York’s Davis Polk & Wardwell and Haiwen & Partners in Beijing. Copyright �2005 TDD, LLC. All rights reserved.

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