Shanda Nasdaq IPO Hit by General Sentiment,
Corporate Governance Issues
When Shanda Interactive Entertainment made its Nasdaq
debut yesterday, it raised only US$152 million, $110 million
short of the $260 million it had hoped to raise. The company
has taken a triple hit: downward sentiment because of
the expectation of interest rate rises in the US, general
suspicion of corporate transparency of Chinese companies,
and ownership issues of Shanda.
Shanda is currently the leader in the quickly growing
online gaming market in China. While the government did
very
well in the run-up to the end of 2003, it has had
to deal with the general pessimistic
sentiment in the market after February. In the US,
there have been fears that the Chinese market is overheating,
and is headed for a hard landing which would affect global
markets.
Then there are certain issues which are specific to Shanda.
The company's largest shareholder is Skyline Media, which
is a holding company held by the CEO Timothy Chen Tianqiao,
his wife,and his younger brother, who hold executive management
positions in Shanda. A Softbank affiliate holds another
25.1 percent of the Skyline Media. Shanda Interactive
Entertainment is structured so that outside investors
do not have a voice in major decisions.
Dual share structures have been popular in China for
different reasons. In the late 90s, they were encouraged
by the Chinese government, which was then afraid that
major foreign shareholders would make decisions affecting
media content for Internet companies. In the US, they
are used by Warren Buffett's company, Berkshire Hathaway,
and in the structure of the proposed Google IPO. The rationale
for them is that they do not want to be affected by short-term
shareholders' interests who will affect their long-term
shareholders' strategic vision. Their argument is that
sometimes short-term interests, and revenues, must be
sacrificed in order to successfully execute long-term
vision and projects. Google, in particular, is seen as
a company which is going public very reluctantly.
The downside for dual-share structure corporations is
that they are often used to shelter incompetent management
in a down market.
Shanda has two popular games which account for 87% of
its revenue; The Legend of Mir II and Wool. Both games
were developed by Wemade Entertainment, a South Korean
company. Shanda began as the China distributor of the
games, but the relationship with the South Korean company
would be best described as "rocky", with frequent
legal battles going on.
Shanda has been actively developing its own game titles,
but so far their success has not compared to the leading
titles.
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