Why Shanda (SNDA) and Sina (SINA) would make a great marriage

by: Ezra Marbach

There has been mixed reaction to Shanda's (ticker: SNDA) acquiring a 20% stake in Sina.com (ticker: SINA) on Friday. While there is much uncertainty in the short-term, a SNDA-SINA combination could be a fantastic combination. Here's why:

Thoughts on the deal:

  • SNDA's timing was great - they bought a bulk of their SINA shares at around $23 after a weak earnings announcement in early February.
  • The FT believes that paying more for SINA than Friday's closing price of $25.60 is too much.
  • But keep in mind, SINA is trading at 22X earnings - and coming off a rare earnings disappointment. With China online growth revving up, is it reasonable that management would sell out at this point without a significant premium? Not likely.

Why the SNDA-SINA merger would be a powerful force:

  • Combined company would enjoy more revenue streams. Both SINA and SNDA have been criticized for having potentially inconsistent revenue streams, and revenue streams that are vulnerable to slowdowns, crackdowns, and in the case of SNDA, failures (of online games). The merger would provide an array of services including region-focused online portals, mobile value-added services, search and directory, community-building channels, free and premium e-mail, a virtual Internet service provider (NYSE:ISP), classified listings, fee-based services, e-commerce and enterprise e-solutions - and of course, the greatest current growth driver - online games!
  • SNDA gives SINA an online gaming presence. A combination with SNDA will give SINA the online gaming presence it didnt have much of previously. And with 12 million Net users, SNDA has a sizeable group to market their services to.
  • Wireless opportunities. As 2.5G is increasingly adopted and 3G licenses are distributed, mobile gaming could be the next platform for SNDA's games. SINA
    already has 12 million mobile users. The combined company could provide those mobile users with games, content, entertainment etc. Is it realistic that the combined company would exit the wireless business, as one analyst has suggested? Hard to imagine.
  • Combining different demographics. SINA and SNDA's user profiles are polar opposites. SINA's user is older and wealthy - SNDA's is young and earns lower income. No doubt this will be an excellent opportunity for SNDA to snag SINA's older and wealthy consumers, who are reportedly increasingly playing online games. SNDA can also reach out to SINA's demographic with its introduction of Internet-TV (OTC:IPTV). On the other side, SINA will benefit from the rollout of IPTV by providing all sorts of content and entertainment services to bolster SNDA's gaming offerings. 
  • SINA gains from SNDA's relationship with the government. SINA has suffered from government crackdowns - most recently due to a ban on broadcast advertisements for wireless fortune-telling services. SNDA has a strong relationship with the government that could limit any future penalties against SINA. The government has provided support for online gaming companies including SNDA in the past, as it recognizes the role that these companies will play in the growth of the Chinese economy. SNDA has also played its cards right and avoided sensitive content in its online games that might incur any government wrath.
  • SINA gains from SNDA's relationship with the government - Part 2. SINA is vulnerable to changes in China Mobile's (ticker: CHL) billing system for certain types of messaging services. China Mobile, 90%-owned by the government, might avoid taking a greater share of wireless service revenue, because of its support for SNDA and online gaming.

Conclusion: The synergies are evident. But until a price for the remaining shares is announced, evaluating the deal is difficult.

One thing is clear. SNDA is in great shape. It just announced strong earnings, and along with licensing a number of successful games, SNDA is developing new online and casual games, and is considering launching IPTV. SINA's prospects, on the other hand, are less clear. But SINA's users and various offerings could help boost SNDA's prospects even more. And vice-versa.