US Internet giant Yahoo made another stride yesterday towards tapping the potential of the world's most populous market with the acquisition of a leading Chinese software development company.

"After investigations on the financial and legal status of 3721 Network Software Co Ltd (3721 NSC), we believe the most attractive point of the deal for Yahoo is its strong support to our businesses,'' said David Lu, vice-president, consumer services, Yahoo North Asia.

The US firm's subsidiary Yahoo Holdings (Hong Kong) Limited signed a definitive agreement with Hong Kong-based 3721 NSC, in which Yahoo will pay as much as US$120 million in two years.

The deal is expected to conclude in the first quarter of next year.

The Hong Kong-based software firm controls Beijing-based 3721, which has the same board structure as 3721 NSC. Both are managed by Zhou Hongyi and his wife.

Beijing 3721, a real name search engine service and Chinese e-mail provider in China, claims that 90 per cent of Chinese Internet users use its service.

Beijing 3721 had a revenues of 140 million yuan (US$16.90 million) last year. Zhou forecasted revenues could reach 200 million yuan (US$24 million) this year. Its profits last year were 40 million yuan (US$4.8 million).

Yahoo, which has been very aggressive in the search engine market with acquisitions of US-based firms Overture and Inktomi in the past two years, will gain strong support to develop the small and medium enterprise market in the Chinese mainland.

The US giant, which first came to China five years ago, has been developing slowly in the market.

Its portal business only made 13.60 million yuan (US$1.64 million) in the first seven months in China from online advertising. China's biggest portal, Sina Corp, made 168.49 million yuan (US$20.35 million), according to Shanghai iResearch Co Ltd, an Internet industry research firm.

"I think maybe Yahoo is very anxious to develop the Chinese mainland market now and wants to seek a breakthrough with the acquisition,'' said Michael Yin, a senior analyst with iResearch.

However, he doubted Yahoo could integrate 3721 NSC's advantages of key word and real name searches into its portal business.

On the other hand, Beijing 3721 has several ongoing suits with the China Internet Network Information Centre (CNNIC), the registrar in China and a semi-official organization in charge of the domain name system, and Baidu.com, another Chinese search engine service provider, relating to real name searches and intellectual property rights.

However, Lu said his company has been keeping good relations with the CNNIC. He believed that relationship would carry on after the acquisition.

Yahoo will also aim to bring 3721 NSC's double-byte search technology, used for languages like Chinese and Japanese that use two bytes of information for one word unlike languages like English that use just one, to other similar countries.

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