Cyber Deal May Spark Shake-Up
South China Morning Post
2005-02-23

A Merger Between Shanda and Sina Is Likely to Ignite a Wave of Internet Consolidation in China, Analysts Say

Second-tier players in the mainland's internet industry are likely to consider acquisitions or alliances of their own should Shanda Interactive Entertainment and Sina Corp link up.

A Shanda-Sina merger would create a mainland media company dominant in three product categories: online games (Shanda), and advertising and wireless content services (Sina). Everyone else lags far behind.

Frank Au Kwok-yu, the managing director of Latitude Capital Group, said: "This combination would truly create a distant No 1 in the marketplace, which could force some consolidation."

Although Shanda has acquired Sina shares on the quiet and now owns a 19.5 per cent stake, a full acquisition or some type of co-operation between the Nasdaq-listed firms is far from certain, especially after Sina adopted a shareholder rights plan yesterday. Nevertheless, the prospect of a deal will force others to improve their game.

Looking particularly weak is No 2 portal player Sohu.com.

Wallace Cheung, an analyst at DBS Vickers, said: "I believe Sohu could be the next target. No single business at Sohu has the leadership position." Duncan Clark, managing director of Beijing-based consultancy BDA China, agreed: "Sohu is under the greatest pressure."

Sina, however, is an easy acquisition target as it has a fragmented shareholding structure and an 87.36 per cent free float. Sohu's free float stands at about 63.28 per cent - a figure that has been dropping as the company buys back its shares.

"It's logical to think about some M&As [mergers and acquisitions] but it really depends on the feelings of the founders," Mr Cheung said.

One of the biggest threats a Shanda-Sina merger would pose is in the mobile gaming sector. Sina has about 12 million mobile customers while Shanda had about two million peak concurrent game users. This should worry Sina and No 3 player Netease.com, which have tried to build their online game businesses organically.

"Both those guys may have to look at gaming acquisitions to accelerate their growth," Mr Au said.

A potential beneficiary is The9, the nation's second-largest game operator, which recently listed on the Nasdaq. The company's small float, however, means a deal would have to be friendly.

Cazenove analyst Stephen Ng talked up the prospects of Hong Kong-listed Tencent Holdings, whose leadership in the instant messaging category would make it a strong partner.

Tencent, which recently hit 10 million peak instant messaging users and one million peak concurrent players of casual games, has 2.3 billion yuan in net cash and is eyeing acquisitions.

Mr Ng upgraded Tencent shares to "outperform" following the Shanda-Sina news, and said: "We expect the valuation of the Chinese internet sector as a whole to move up, stimulated by the potential takeover of Sina by Shanda."

Tencent shares rose 8.63 per cent on Monday but fell back 1.87 per cent to $5.25 each yesterday.

If consolidation sweeps the industry, wireless content providers such as Tom Online, Linktone, KongZhong and Hurray Holdings will probably be left out.

Mr Clark said portals - stunned in recent months by steep fines for violating rules on pornography and spam messages - would not want increased exposure to the sector.

Although some industry watchers have described Shanda's acquisition of the Sina stake as bold - it is not clear how Sina management might respond - similar brash moves by rivals were not expected.

A Shanda-Sina union would not have "the ability to knock out Netease or Sohu", Mr Au said.

Foreign players such as Yahoo! were likely to consider acquisitions but full takeovers could be complicated by mainland rules governing the internet, Mr Clark said. Still, he added, "there could be some stake building".

By Michael Logan