Saif Vc Fund Takes Shanda Inc. Public By Mikael Thakur

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 312rmb/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.

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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 nonrestricted 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 Source d throug h BP submis sion on referral

Guang xi – very relation ship based

•

•

Analysi s based on BP LOI to kick off due diligen

•

BPs typicall y low quality

•

LOIs of lesser import ance

VC Process in China

•

Initial Structu re and valuati on of busine ss

•

Negoti

•

Alignm ent of interest s and trusts empha sized

•

Contra

•

•

VC participa tes on the board and company as appropri

Operatio nal involve ment of VCs much higher and more cost intensiv e

•

Exit via: o

IPO

o

Trade sale

o

etc

•

IPO market lacks liquidit y

•

Trade sale preferr ed

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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).

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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

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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 Balance Sheet Assets 112.2 Long Term Debt 0 Net Worth 75.2 Income Statement Revenues 72.5 EBITDA 38.5 Net Income 33 Market Data Share Price n/a EPS ($/share) n/a Price/Earnings (times) n/a Shares Outstanding 44.9 (millions) Notes: All values have been converted to rate as provided by http://www.xe.com/ict/.

NetEase.com

Webzen

Sohu.com

215.9 100 106.4

173.4 5.3 13.8

205 90 91.6

68.8 41.6 39

47.8 30.4 30.2

80.4 31.1 26.4

36.92 12.58 2.93 3.1

10.39 10.07 1.03 3

29.91 0.655 45.66 40.3

USD at the relevant historical exchange All figures are as at December 31, 2003.

The following table calculates the implied value of Shanda based on these comparable firms: NetEase.c om 2.93 2.75

P/E Market Value/EBITDA Market Value/Sales 1.66 Market Value/BV 1.08 Equity

Webze n 1.03 1.03

Sohu.co m 45.66 38.76

Averag e 16.54 14.18

Implied Shanda 545.82 545.90

0.65 2.26

15.07 13.16

5.79 5.50

420.02 413.60

3

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

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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

Revenues

$72.50

$128.60

Costs

$43.00

EBITDA

$29.50

2005

2006

2007

2008

$171.10

$214.47

$252.33

$277.56

$72.90

$85.00

$118.44

$139.35

$153.28

$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

EBITDA

2005

2006

2007

2008

$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

$7.06

$11.11

$12.22

$14.37

$15.81

$48.64

$74.99

$83.81

$98.60

$108.46

$5.80

$11.00

$13.73

$16.15

$17.76

$42.84

$63.99

$70.09

$82.46

$90.70

Less: Tax Net Income Less: NWC

Change

Free Cash Flow

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 PV (Cash WACC-3%

2004

2005

2006

2007

2008

Sum

$38.23

$50.9 6

$49.8 1

$52.2 9

$51.3 3

$242.6 1

$37.24

$48.3 4

$46.0 1

$47.0 5

$44.9 8

$223.6 0

$36.29

$45.9 1

$42.5 9

$42.4 4

$39.5 5

$206.7 8

Flow)

PV (Cash Flow) PV (Cash Flow) WACC+3%

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

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below as well as changes in the sales percentage (not shown) will drastically affect valuation. VALUATION OF SHANDA Terminal growth 5.0% WACC -3%

Terminal growth 10.0%

Terminal growth 15.0%

$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.

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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

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Appendix B: Shanda’s Success Milestones

Financial Success

December 1999 Established company

- Total revenues for the full year 2004 were

September 2001 - Entered China's online game market

US$165.2 million, a 115.8% increase from the full year 2003. - Net income for the full year was US$73.6

November 2003 Acquired Silicon Valley based company: Zona

million, a 123.4% increase from the full year

May 2004 - Shanda IPO on Nasdaq.

- For the full year 2004, online game revenues

2003.

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

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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

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Appendix D: Post-IPO Ownership Chart

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Appendix E: Share Ownership Pre- and Post-IPO

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