Venture Capital and Private Equity

VC In China:
Shanda and SAIF

Mikael Thakur 3/10/2009

Executive Summary
Shanda is an operator of massively multiplayer online roleplaying games
(MMORPGs) in China. SAIF, a venture capital fund financed by Cisco, currently holds
approximately 25% of the equity in Shanda. Shanda has identified a need for $90
million in order to finance its future growth plans, and has planned an IPO on the
NASDAQ in order to raise this capital. However, a threat of litigation combined with
a downturn in the overall economic climate have led to concern regarding the size
and pricing of Shanda’s IPO. Differing valuation approaches place the value of
Shanda from $500 million to slightly over $1 billion, but the market price which is
expected to be realized would value the firm lower than these valuation approaches
would suggest. An examination of the options available to Shanda revealed that
proceeding with the IPO at a reduced price is in fact the best course of action for the
firm.

Contents
Executive Summary............................................................................................ ........2
Introduction........................................................................................ ........................3
Venture Capital in China.............................................................................................4
Background................................................................................ .............................4
The Chinese VC Process..........................................................................................5
Shanda........................................................................................ ...............................6
Why an IPO?.................................................................................. ..........................6
SAIF................................................................................................. ...........................7
Shanda and SAIF.....................................................................................................7
Cisco.............................................................................................................. .............7
Challenges Facing the Shanda IPO..............................................................................8
Economic Environment.................................................................................. ..........8
Litigation................................................................................. ................................8
Valuations.................................................................................................... ...............8
Comparables Approach...........................................................................................8
Net Present Value..................................................................................................10
Options................................................................................................ .....................12
Evaluation and Recommendation.............................................................................14
Evaluation Criteria.................................................................................... .............14
Recommendation..................................................................................................14

Page | 2
Aftermath.................................................................................................................. 14
Appendix A: Demographics......................................................................................16
Appendix B: Shanda’s Success.................................................................................17
Appendix C: SAIF Fund Manager Profiles..................................................................18
Appendix D: Post-IPO Ownership Chart.....................................................................19
Appendix E: Share Ownership Pre- and Post-IPO......................................................20

Introduction
China is a country that is under transition. From a socialist past, the country is on
course for a capitalist future. Inhabited by nearly a fifth of the world's population, its
economy has yet to catch up to its population growth, but this gap is rapidly
narrowing. China's GDP in 2004 was USD $1.6 trillion with a growth rate of 8% per
year, a staggering amount comparing to the USA, one of the world's wealthiest
nations (See Appendix A: Demographics). China is already the world's seventh
largest trader and after 15 years of negotiations, in 2001 China joined the World
Trade Organization (WTO). Entry into the WTO signalled the country’s shift towards
a market economy. The country has two stock exchanges, the Shanghai and
Shenzhen exchange, in which the listed company's ownership mainly consisted of
the government. Lack of liquidity and transparency posed a problem, and in 2004
the government established a sub-board of the Shenzhen exchange that was
intended to provide smaller companies much-needed liquidity, as attaining loans
was cumbersome and difficult. China has experienced significant macroeconomic
events that would have an impact on the national as well as the global economy,
namely: the Asian financial crisis of 1997, the Internet crash of 2001, SARS outbreak
in 2003, and the tightening of their fiscal policy in early 2004. In that very same
year, the government made a monumental change to their business policy which
allowed the legalized ownership of private property as well as giving corporations
an infinite life.1 Businesses in the private sector were thriving in 2004. With its
limited resources, the country still manage to adopt innovation. With the high cost
of PC ownership, Internet cafes prevailed. Hourly rates are very low, between 3-
12rmb/hr, and these cafes are also considered social gatherings. Cultural norms and
behaviour perplexed foreign investors, as most were not familiar with the concept of
guanxi - a term that means preference to do business with a select member.
Nevertheless foreign investors were intrigued by the country's opportunity and
growth prospects.

1
Matin Hu, “Company Limited by Shares,” China Law and Practice (April 2004), p.1.

Page | 3
Venture Capital in China
Background
The Chinese VC industry is still in its infancy stage, and is developing slowly mainly
by trial and error. In 2003, capital under management in China was $6.7bn and grew
to $12.8bn in 2007. During the time of the case, VC funds had access to mainly
savings capital and funds in the form of angel investors. However, considering that
there is a high savings rate in China (on average 30% of GDP), this translates into
$960bn in funds potentially available. Recently, the Chinese government passed
legislation permitting VC funds access to pension funds and savings as well, making
it more attractive for entrepreneurs as well as VC funds to consider the Chinese
market.

At the time of the case, foreign VC funds had only two methods to invest in the
Chinese market, both of which were indirect. A Special Purpose Vehicle (SPV) was
established and controlled by the founders/shareholders of the target firm. The SPV
would then acquire all the equity of the target firm, which then the foreign investors
can invest in. This enabled VCs to circumvent the regulatory hurdles, tax laws and
infant IPO market. Depending on the type of firm foreign VC funds were investing in,
two different structures were followed (Refer to Table 1).

TABLE 1: Investment Structures in Chinese Firms for Foreign VC’s

Source: Venture Capital & Private Equity A Case Book

The diagram on the left shows the method utilized by VC funds investing in non-
restricted firms (such as Shanda). The VC would invest in the target firm’s off-shore
holding company and set up an onshore representative office to manage the
investment. However, if investment was made in a restricted company then the

Page | 4
target company had to establish a licensing and service revenue generating vehicle
to circumvent the legal constraints. Revenue would then be routed back to the
offshore holding company. Although both processes seem to be cumbersome, it
facilitates investment in China as it increased the possibilities of exit as companies
were able to list on non-domestic exchanges. More recently, China has changed
these rules so that a foreign VC can directly invest in a target firm through a joint
venture.

The Chinese VC Process

The Chinese value and place an importance on guanxi, which values relationships
much higher than any other factor when conducting business. Therefore, unlike the
West, where business plans have a greater importance in determining whether a VC
will invest, the strength of relationships between people has a greater prominence.
This translates into information asymmetries between the entrepreneur and the VC
managers, which in China is tolerated. Therefore, foreign VCs have to take greater
caution when entering the Chinese market as they have to build the relationships
and trust in order to have a greater chance of profiting from the venture. In the case
with Shanda, SAIF took the risk of going forward with the venture even when 99% of
the revenue stream could have been lost due to the litigation with Actoz. This
enabled SAIF to garner trust from the founders at Shanda and is why SAIF was able
to easily convince Chen to lower the IPO price. The table below highlights the
differences between the VC process in the West and China.

TABLE 2: Comparison between VC Processes in the West and China

VC Process in the West

• Deal • Analysi • Initial • VC • Exit via:

Source s Structu participa
d based re and tes on o IPO
throug on BP valuati the
h BP on of board o Trade
submis • LOI to busine and sale
sion on kick off ss company
due o etc
referral as
diligen • Negoti appropri

• Guang • BPs • Alignm • Operatio • IPO

xi – typicall ent of nal market
very y low interest involve lacks
relation quality s and ment of liquidit
ship trusts VCs y
based • LOIs of empha much
lesser sized higher • Trade
import and sale
ance • Contra more preferr
VC Process in China cost ed
intensiv
e Page | 5
Source: Bruton et al. (2004)

Shanda
Shanda Interactive Entertainment (“Shanda”) is a technology company founded by
Tim Chen (Chen Tian Qiao) and his family in 1999. Upon its inception, the company
was private and family owned. With the popularity of internet cafes in China and the
country's adoption of technology, Chen saw an opportunity in the massively
multiplayer online role playing game (“MMORPG”) segment. Online gaming in China
at the time had relatively little competition and overcame software piracy,
something which China was notorious for. In China 91% of the software installed
was pirated, resulting in a sector loss of $646 million.

In 2001, Shanda licensed the game Legend of Mir II from a Korean MMORPG vendor,
Actoz, and adapted it to the Chinese market. The game was a wild success and
Shanda became profitable in 2001. MMORPG's strength lied in its business model,
as the legal addiction of the game and low cost drivers generated a sustainable
revenue stream. Shanda had achieved first mover advantage in this segment and
because of the community driven focus of the game – MMORPGs require players to
spend hours in front of the PC in order to achieve any real progress in the game –
the company effortlessly created barriers to entry and exit.

The online gaming market in China was valued at over $360 million in 2004 with
over 20 million active paying users. At its peak, Shanda owned 70% of the online
gaming market in China, and as of 2004 it was roughly around 50%. Some of the
company's milestones and financial success can be seen in Appendix B: Shanda’s
Success. In mid 2002 Shanda sought VC funding for acquisitions and to retire old
shares.

Why an IPO?
Privately held corporations who are growing rapidly need to raise additional capital
in order to sustain growth. They can do this by either taking on debt or giving up
partial ownership of the company by going public through an initial public offering
(IPO). Recently, Chinese companies have sought external financing by the latter
and have been quite successful. The two most common forms of IPO's are i) best
efforts and ii) firm commitment. In “best efforts” IPO the underwriter agrees to use
all efforts to sell as much of an issue as possible to the public, however if they are
not able to sell all the securities, they are not responsible for any unsold inventory.
In “firm commitment” IPO, the underwrite agrees to assume all inventory risk and
purchase all securities directly from the issuer for sale to the public at a specified
price. SAIF wanted to take Shanda public on the NASDAQ exchange under best
efforts agreement, with Goldman Sachs underwriting the IPO. SAIF planned on
selling 17.32 million shares at $15/share to raise $260 million.

Page | 6
SAIF
Softbank Asia Infrastructure Fund (“SAIF”), founded in 2001, is a USD $400 million
Hong Kong based venture capital (VC) firm. Although a part of Softbank, SAIF
categorizes itself as an independent non-corporate VC fund. It had its own
independent management with compensation tied to performance. Softbank was
technically the general partner and fund manager, while SAIF was contracted to
perform the investment and portfolio company management tasks.

Cisco Systems was SAIF's sole limited partner, having pledged a total of $1.05
billion (more on Cisco below). Andy Yan, the president and executive managing
director, was instrumental in recruiting a team that understood the Asia market
(See Appendix C: SAIF Fund Manager Profiles).

Shanda and SAIF

SAIF managers were interested in investing in online companies before Shanda had
entered the MMORPG scene. After SAIF's failed attempt in Korea, Andy Yan was
introduced to Shanda's Tim Chen, and the partnership blossomed thereafter. SAIF
was more interested in Shanda's management team and operations than the actual
product offering itself, which at the time was not owned by Shanda and the
company was in the midst of various legal issues over IP and licensing. Shanda
would be SAIF's first IPO and the company had invested $40 million for 24.9% of the
company for a post money valuation of $160 million.

Cisco
Cisco is the sole limited partner investing in SAIF. The technology infrastructure
giant invested a total of USD $1.05 billion through Softbank, with $400 million being
allocated to SAIF. Cisco’s investment was made with the goal of “building the core
infrastructure throughout the region to energize widespread use of broadband,
optical, wireless, and other Internet-based services and technologies.”2

This arrangement has the potential to give rise to significant conflicts in managing
the fund. Although Cisco is only a limited partner, and thus has no direct influence
over the management of the fund, the fact that the money which SAIF is managing
belongs completely to a firm which has a goal of growing a market instead of
maximizing direct returns could give rise to a host of agency problems. SAIF,
seeking to maximize its compensation through carried interest, would be more
inclined to invest in firms with the highest potential returns, while Cisco may prefer
to invest in a firm which will grow the market but yield a lower return.

Despite this conflict, SAIF and Cisco were able to realize certain synergies in their
relationship. SAIF was able to rely on Cisco to review the technical feasibility of
potential deals. SAIF was also able to leverage the partnership with Cisco by
2
“Softbank Sets Up New Fund to Build Asia’s Internet Infrastructure,” Asia Pulse (January 25,
2001).

Page | 7
connecting Cisco as a supplier or customer to investee firms. This complementary
relationship worked to the advantage of both parties, as it enabled Cisco to be
apprised of the leading edge technologies in the Asian markets, and it
simultaneously provided SAIF with invaluable expertise on the technical aspect of its
deals.

Challenges Facing the Shanda IPO

Economic Environment
The environment that was present during the time of the IPO was not very
conducive to achieving a high IPO price. In 2001 the dot com bubble burst and
people in general were wary about investing in companies that were internet and
technology based. Additionally, in 2003 there was a SARS epidemic which caused a
25% decrease in internet café usage in China, which had an impact on Shanda’s
revenue. Both these events meant that Shanda’s decision to place an IPO on the
NASDAQ was mistimed.

Litigation
In 2002 Shanda decided to stop paying license fees to the Korean firm Actoz, as
Shanda believed that Actoz was not honouring its side of the bargain. Due to the
failure by Actoz to continuously update the online system, the portion of the game
that was hosted on Shanda severs was leaked on the internet, which meant that
internet cafes did not have to access the servers thus affecting a revenue stream
for Shanda. In retaliation, the Korean firm threatened to terminate the license
agreement and did so unilaterally in 2003. This caused a stir in the VC community
and brought about doubts on whether Shanda would be able to become a long-term
success. Even though SAIF decided to go through with the deal; investors were
concerned on Shanda’s revenue generating capabilities.

Valuations
Comparables Approach
In preparing a valuation based on comparable firms, one of the chief difficulties we
experienced was finding other Chinese operators of online games that were
publically traded in 2004. After reviewing the firms which were in the relevant
market in 2004, we feel that a comparison to NetEase.com, Webzen, and Sohu.com
provides a reasonable proxy of the market conditions facing Shanda.

NetEase.com is an operator of massively multiplayer online role-playing games in

China. In 2004, the firm offered several variations of the ‘Westward Journey’ series
of games, and was preparing to launch a new virtual flying game to target casual

Page | 8
gamers.3 Much like Shanda, NetEase’s games were accessible for free through a
web browser, and players paid a fee based on the time spent playing.

Webzen is a developer and operator of online games in Korea and China. The firm
offers a wide variety of games, with an emphasis on massively multiplayer online
role-playing games including the ‘Soul of the Ultimate Nation’ and ‘MU’ brands.
Although Webzen games are available in both Korea and China, in 2004 the majority
of revenues were earned in Korea.

Sohu.com is an internet services company in China. The firm operates several

massively multiplayer online games, including ‘Blade Online’ and ‘Tian Long Ba Bu’.
Earnings from these games is supplemented by advertising revenues from ads
placed within the games, as well as ads on one of several games information portals
operated by the firm.

Shanda NetEase.com Webzen Sohu.com

Balance Sheet
Assets 112.2 215.9 173.4 205
Long Term Debt 0 100 5.3 90
Net Worth 75.2 106.4 13.8 91.6
Income Statement
Revenues 72.5 68.8 47.8 80.4
EBITDA 38.5 41.6 30.4 31.1
Net Income 33 39 30.2 26.4
Market Data
Share Price n/a 36.92 10.39 29.91
EPS ($/share) n/a 12.58 10.07 0.655
Price/Earnings (times) n/a 2.93 1.03 45.66
Shares Outstanding 44.9 3.1 3 40.3
(millions)
Notes: All values have been converted to USD at the relevant historical exchange
rate as provided by http://www.xe.com/ict/. All figures are as at December 31, 2003.

The following table calculates the implied value of Shanda based on these
comparable firms:

NetEase.c Webze Sohu.co Averag Implied

om n m e Shanda
P/E 2.93 1.03 45.66 16.54 545.82
Market 2.75 1.03 38.76 14.18 545.90
Value/EBITDA
Market Value/Sales 1.66 0.65 15.07 5.79 420.02
Market Value/BV 1.08 2.26 13.16 5.50 413.60
Equity

3
NetEase.com Inc.: Online Games Overview, accessed 9 March, 2009,
http://corp.163.com/eng/games/overview.html.

Page | 9
Despite a significant level of variance across the three comparable firms, the range
of valuation of $413 million to $546 million is fairly narrow. Although far from
concrete, this range of valuation provides a reasonable benchmark from which to
compare the results of further valuation methods.

Net Present Value

An analysis was done to determine a valuation based on the net present value
method. Note all values are in millions of US dollars.

Revenues, costs, and EBITDA, can be seen in the table below. Values for 2003 (in
grey) are actual values, values for 2004 and 2005 are values described in Lerner et
al, values for 2006 through 2008 (in bold) are predicted values based on the percent
of sale method, using an assumption of linear decline of growth of sales from 33% in
2005 to a terminal rate of 10% in 2008.

2003 2004 2005 2006 2007 2008

Revenues $72.50 $128.60 $171.10 $214.47 $252.33 $277.56

Costs $43.00 $72.90 $85.00 $118.44 $139.35 $153.28

EBITDA $29.50 $55.70 $86.10 $96.03 $112.98 $124.28

Depreciation & amortization (D&A), EBIT, tax, net income, change in net working
capital and free cash flow are shown in the table below. Note that D&A and change
in NWC are calculated by the percent of sale method.

Year 2004 2005 2006 2007 2008

EBITDA $55.70 $86.10 $96.03 $112.98 $124.28

D&A $6.56 $8.73 $10.95 $12.88 $14.17

EBIT $49.14 $77.37 $85.08 $100.10 $110.11

Less: Tax $7.06 $11.11 $12.22 $14.37 $15.81

Net Income $48.64 $74.99 $83.81 $98.60 $108.46

Less: Change
NWC $5.80 $11.00 $13.73 $16.15 $17.76

Free Cash Flow $42.84 $63.99 $70.09 $82.46 $90.70

The weighted average cost of capital was determined based on the company’s
current situation, where all funding is derived from equity, using the following .

WACC = Rf + β(Rm-Rf) = 15.02%

Page | 10
β was determined to be 1.5, based on the average of the β’s of Electronic arts
(0.98), TOM online (2.5), and NTES (1.07). Rf the risk free rate is based on the
average rate of 10 year US treasury bill in 2004, 4.8%. (Rm – Rf) is the delta between
the market risk and the risk free rate which is assumed to be 6.75%.

The table below shows net present values of cash flows assuming three different
adjusted WACC’s, the WACC described above, the WACC described above plus 3%,
and the WACC described above minus 3%.

Year 2004 2005 2006 2007 2008 Sum

PV (Cash Flow) $50.9 $49.8 $52.2 $51.3 $242.6

WACC-3% $38.23 6 1 9 3 1

$48.3 $46.0 $47.0 $44.9 $223.6

PV (Cash Flow) $37.24 4 1 5 8 0

PV (Cash Flow) $45.9 $42.5 $42.4 $39.5 $206.7

WACC+3% $36.29 1 9 4 5 8

Net present Terminal values, NP(TVT) are calculated using the following equation.

NP(TVT) =((CF2008*(1+g)/(r-g))/(1+r)5)
Where CF2008 is the free cash flow in 2008, r is the WACC (or adjusted WACC), and g
is the terminal growth rate. The Table below Shows NP(TVT) calculated for various
WACC’s and terminal growth rates. Note that a terminal value cannot be
determined for a growth rate greater than the adjusted WACC, thus the value in the
table below for WACC – 3% and terminal growth rate at 15% is blank.

NP(TVT) NP(TVT) NP(TVT)

(terminal 5%) (terminal 10%) (terminal 15%)

WACC -3% $763.38 $2,740.84

WACC $469.44 $977.76 $86,205.79

WACC +3% $317.94 $539.70 $1,486.19

The estimated values at various adjusted WAACs and terminal growth rates for
Shanda are shown below. The predicted valuation based on the WACC and 10%
terminal growth rate is approximately $1,201 million. Twenty five percent of the
company would be worth approximately $300 million dollars. Note that
assumptions in the model regarding terminal value and WACC shown in the table

Page | 11
below as well as changes in the sales percentage (not shown) will drastically affect
valuation.

VALUATION OF SHANDA

Terminal growth Terminal growth Terminal growth

5.0% 10.0% 15.0%

WACC -3% $1,006 $2,983

WACC $693 $1,201 $86,429

WACC +3% $525 $746 $1,693

Options
We have identified 4 main options that SAIF and Shanda could move forward with,
including 1) lowering the IPO price point, 2) Delaying the IPO, 3) Continuing current
growth and 4) Choose for a private sale or a merger or acquisition.

1) Lowering the IPO Price Point: Shanda’s main reason for listing is to raise $90m in
order to fuel its growth. Currently the IPO price of $15 is expected to raise
approximately $250mn which represents about 25% of the company. Therefore,
one of the main advantages of going forward with a lower $11 IPO price would
be that Shanda would still bring in the required $90mn. Additionally, by going
forward with the IPO now, Shanda will be able to raise the money required to
stay ahead of the curve. Shanda wants to use the capital to acquire and develop
games, which in this sector of the industry is the main mode of growth. By
foregoing this opportunity Shanda runs the risk of losing its status as market
leader (currently has 50% of the market) and so may not find a favorable IPO
price in the future.

However, the main drawback is that Shanda’s management will lose 20% of the
potential IPO proceeds due to the lower price of $11. This translates into a loss of
$6mn to the principals and $9.5mn to SAIF. In addition, based on both the NPV
and comparable methods the IPO for 25% of Shanda at $150 million is far lower
than its valuation. Shanda’s price should be somewhere between $200 and $300
million.

2) Delaying the IPO: As mentioned earlier, the overall climate for internet based
IPOs are not favorable. Plus due to economic conditions present at the time, the
value of the company may be lower than it should be. By delaying the IPO,
Shanda may be able to attract a higher price in the future.

Page | 12
 However, the risk of this option is that Shanda and SAIF have no way of knowing
when the economy will recover and market conditions become favorable for a
tech listing. Additionally, it will delay the growth opportunities that management
has envisioned with the $90mn in proceedings, which may cause Shanda to
become a market laggard. Delaying will also mean the founders and SAIF will
have to wait till a later date for returns and although a sunk cost, Shanda will
have to re-incur the filing fees for another IPO, which at the present is at a future
date surrounded by uncertainty.

3) Continuing Current Growth: Shanda’s sustainable growth rate is calculated to be

78% (in 2004). Current growth is at 54% and therefore Shanda does not need
the funds to maintain growth at the current rate. The advantages of this option is
that the equity remains with the founders and SAIF which translates into greater
control over the direction Shanda chooses to take in terms of growth.

However the disadvantages are that it means the company will have to grow at
a slower rate due to no immediate cash infusion. While Shanda is profitable and
they could grow without major cash flow issues by approximately $55 million in
2004, management will not be able to invest $90 million in the development of
products they believe are needed to maintain their market position and this may
negatively impact their future valuations. This may be a risky decision
considering that the speed and timing to market of new games and sequels is
critical to retaining current customers. Additionally it would delay returns for
both the founders and SAIF.

4) Private sale or Merger/Acquisition: Both of these alternatives are a viable option

for Shanda if the founders feel that they have reached their capacity for growth.
A merger would give Shanda access to capital and potentially a more
experienced management team, while an acquisition or private sale would
permit the founder’s a viable exit strategy if they do want to retire.

However, both these options would mean a greater amount of time and money
spent on finding the right firm or individual to sell to. Additionally there is no
guarantee that Shanda will be able to find a suitable buyer willing to pay a
premium for the company. It would also mean that Shanda’s founders are likely
to lose control over the strategic direction of the firm which may not be
attractive to them.

Page | 13
Evaluation and Recommendation
Evaluation Criteria
In order evaluate the above options to determine which would be the ideal for
Shanda’s current situation we have drawn up the following criteria: 1) Satisfying the
requirement of raising the $90mn to fund current growth decisions, 2) maintain
Shanda’s current status as market leader and 3) satisfy an adequate return on
investment for SAIF and founders.

Recommendation
We have determined that option 1 best satisfies the three above criteria. The
current lower price of $11 will more than satisfy the primary goal of the founders to
raise the $90 million to fund growth. Since the gaming industry requires constant
investment in order for companies to remain in the game, the $90 million will also
enable Shanda to remain the current market leader and ensure that its games will
continue to attract customers. Finally the option will enable both the founders and
SAIF to gain an adequate return on its investment. Further since this is SAIF’s first
major deal, by going through with it will enable the fund managers and SAIF to build
a reputation within the industry that will enable it to attract greater deal flow with
ease. On the flipside, listing on the NASDAQ will enable Shanda to gain the
reputation and status required to solidify its presence, particularly in the Chinese
market, which will enable it to become an attractive company for investors. This
option will result in a win-win situation right now.

Shanda needs capital to maintain its position as the market leader for MMORPGs in
China. While currently there is little competition in the market place the current
license of MIR 2, from ACTOZ will expire in less than two years and without an
infusion of capital Shanda will not be able to develop the games needed to maintain
its market lead. Given that 1) development cycles for games can take months if not
years, and 2) once developed the growth of a game in the market place can take
additional time, Shanda should look to get this cash infusion sooner rather than
later. For this reason, it is suggested that Shanda accept the IPO at $11 per share,
~$150 million, even though the resulting capital raised will be less than the
projected value of Shanda by both the NPV and comparables methods. While it is
possible that the markets would improve none of the other options would allow the
rapid growth required by management to maintain their market lead.

Aftermath
Ultimately, Shanda ended up proceeding with its IPO at a reduced price and for a
reduced number of shares. The company began trading on the NASDAQ on Friday,
May 14, 2004 at a price of $11 per share for 13.85 million shares. This raised a

Page | 14
gross of USD $152 million for Shanda, which was well short of the $260 million it
had initially targeted.

It is worth noting that at $11 per share, Shanda’s IPO appears to have been slightly
underpriced. The shares traded at a high of $12.38 on the first day, though they
closed at $11.97.4 This represents an underpricing of slightly less than 9% over the
first day, which indicates that the $11 price was a quite accurate assessment of a
valuation the market would bear.

In retrospect, it seems that Shanda may have been better off to follow the option of
delaying its IPO in order to wait for more favourable market conditions. By
December 31, 2004, market conditions were strong, and Shanda’s shares were
trading at a peak of $42.50, a nearly four-fold increase over its initial price less than
eight months prior.5 However, it is also necessary to recognize that the funds
collected by Shanda’s IPO helped to fuel the firm’s rapid growth, and the realization
of this growth could have contributed significantly to the appreciation in Shanda’s
valuation.

A graphical representation of Shanda’s corporate structure following its IPO can be

found in Appendix D. This chart, along with the table in Appendix E, shows that
Softbank was able to maintain significant ownership of Shanda, with a stake of just
under 20% of the firm’s equity.

4
Google Finance: Historical prices for SNDA, accessed 8 March, 2009,
http://www.google.ca/finance?q=NASDAQ:SNDA.
5
Ibid.

Page | 15
Appendix A: Demographics
China US

Cell Phone Users 269 million 159 million

Internet Users 79.5 million 159 million

PC Owners 35 million 190 million

2004 GDP $1.5 trillion USD $11.7 trillion USD

2004 GDP Growth 8% 3%

GDP Per Capita $5,720 USD $39, 820 USD

Page | 16
Appendix B: Shanda’s Success
Milestones Financial Success
December 1999 - - Total revenues for the full year 2004 were
Established company
US$165.2 million, a 115.8% increase from the
September 2001 - Entered
full year 2003.
China's online game
market - Net income for the full year was US$73.6
November 2003 - million, a 123.4% increase from the full year
Acquired Silicon Valley
based company: Zona 2003.

May 2004 - Shanda IPO on - For the full year 2004, online game revenues
Nasdaq.
increased 105.4% to US$154.2 million

China Users
• 250+ million plus unique visitors

• 50+ million active playing

• 20+ million active paying

• 2D MMOG per capita most popular in rural areas

Casual games popular everywhere and all age groups and genders

• Currently almost 50/50 iCafe, Broadband home user

• User base number are levelling off currently focusing on more money per user
more than user growth.

Source: Diyu Liu,Development Manager of Shanda

Page | 17
Appendix C: SAIF Fund Manager Profiles
Andy Yan President and Executive Managing Director

Joined: October 2001

Education: Bachelor of Engineering, Nanjing Aeronautic Institute; Master
of Arts in Sociology and Economics, Peking University; Master of Arts in
International Political Economy, Princeton University; International
Finance, Wharton School Executive MBA Program

Experience: Emerging Markets Partnership, Principal Advisor to AIG

Asian Infrastructure Funds, Managing Director & Head of Hong Kong
office; Sprint International Corporation, Director of Strategic Planning &
Business Development; The World Bank, Economist, Policy, Planning and
Research division; Hudson Institute Washington, D.C., Research Fellow;
State Commission for Economic Restructuring of the State Council of
China, Research Fellow; Jianghuai Airplane Corporation, Chief Engineer

Hobbies: Golf, Hiking, Reading

Jing Huang Managing Director

Joined: January 2002

Education: B.A. Beijing Foreign Languages University,

China; MA Stanford University; MBA Harvard Business
School

Experience: SUNeVision Ventures, Partner, Silicon Valley

Office; Intel Capital, Senior Manager of Strategic
Investment, Wireless Sector; Gartner Group, Director of
Research Operations, Asia Pacific; GWcom Inc., Cofounder,
Vice President of Marketing

Joe Zhou Director

Joined: October 2001

|
Education: MS Electrical Engineering, New Jersey Institute
of Technology; BS Electrical Engineering, Beijing Polytechnic
University

Experience: SoftBank China Venture Capital, Chief

Representative, Beijing Office; UTStarcom (China), Vice
President; AT&T Bell Labs, Consultant; Lepton, Inc., Project
Manager, Application Technology

Page | 18
Appendix D: Post-IPO Ownership Chart

Page | 19
Appendix E: Share Ownership Pre- and Post-IPO

Page | 20