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Baidu and to Merge?

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Reportedly, China’s largest search engine, Baidu’s (BIDU - Free Report) Qunar unit will merge with International Ltd. (CTRP - Free Report) to expand its travel search market. Shares of Ctrip surged 10.4% in after-hours trading.

Baidu’s ownership in Qunar Cayman Islands Limited — a travel website — came through the acquisition of a majority stake (55%) in the company for $306 million in cash.

The proposed merger could be a complete acquisition, a partnership or just a small ownership in, according to sources. Information regarding the ownership structure, financing methods and other details has been kept confidential.

Shanghai-based was founded in 1999 by James Liang, Neil Shen, Min Fan and Ji Qi. It provides travel services for hotel accommodations, packaged tours and corporate travel management.

Travel contributes a major share of Baidu’s advertising revenues. Therefore, if this deal goes through, Baidu’s traffic volume would increase considerably and consequently generate higher advertising revenues. According to iResearch, Ctrip had a 47.3% share of the Chinese online travel market in 2012.Thus, the deal will also help Baidu better compete with Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

Travel search is gradually becoming one of the fastest-growing segments of the online travel industry. As per iResearch, China’s online travel market is expected to reach 465 billion yuan ($75 billion) by 2017 driven by increased spending of the middle class on leisure and entertainment.

Therefore, to increase its presence in online travel, video and e-Commerce market, Baidu has acquired a number of companies in the recent quarters. Last year in May, Baidu acquired the online video business of the Shanghai-based PPS for $370 million to become China’s largest online video platform by the number of mobile users and video viewing time. In July, the company bought a leading mobile applications platform, 91 Wireless Websoft for $1.9 billion, the biggest acquisition in the market last year. The company has made many more acquisitions, including Nuomi and Beijing Huanxiang Zongheng, the online literature business of gaming company — Perfect World.

Despite benefiting Baidu in the long run and helping it to remain competitive, these investments will have an impact on near term earnings. In the last concluded quarter, the company’s earnings of $1.29 per share missed the Zacks Consensus Estimate of $1.38 due to increased investments. These investments are likely to remain an overhang on earnings and margins in the near term.

Baidu provides Internet search services in Chinese. It also offers a Chinese language search platform for businesses to reach their customers. Following the news, the shares surged 5.19% in after-hours trading.

Currently, Baidu has a Zacks Rank #5 (Strong Sell). A better-ranked stock that offers an attractive investment option this season is Facebook Inc. (FB - Free Report) , carrying a Zacks Rank #2 (Buy).

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