Struggles Continue At Shanda, Perfect World
More signs of turbulence are coming from the troubled online game space, with word that the CEO of Shanda Games (Nasdaq: GAME) has resigned and Perfect World (Nasdaq: PWRD) has overhauled its R&D division to breathe new life into the company. There’s quite a lot of back story to these latest news bits, including a strategic equity alliance announced by the 2 companies at the start of the year that later fell apart for unexplained reasons. The bigger story is the fierce competition in China’s online game market, which has left companies like Shanda and Perfect World struggling to grow and has dampened investor enthusiasm for new gaming IPOs.
I was quite excited when Perfect World and Shanda announced their tie-up at the beginning of this year, as it looked like a positive move for an industry in desperate need of consolidation. The tie-up was part of a management-led bid to take Shanda Games private, with Perfect World joining the consortium that made the bid. But then the bid appeared to be falling apart last month, when Perfect World and some other major partners withdrew from the buyout group for unstated reasons. (previous post)
Shanda Games’ parent, which was leading the bid, insisted the buyout was still moving ahead. Investors appeared to believe that, as the company’s share price maintained its levels close to the $6.90 buyout offer price. The stock has continued to stay at those levels, even after the latest announcement that Zhang Xiangdong has resigned from his position as CEO and a member of the company’s board. (company announcement; Chinese article)
This particular move isn’t that surprising, as Shanda Games has been struggling for years. Its latest reporting quarter was quite typical, with revenue dipping 12 percent and profit tumbling nearly 50 percent in the 3 months through June. What’s slightly surprising is the timing of Zhang’s removal, since you typically wouldn’t expect this kind of change in the middle of a major move like a privatization.
Shanda Games and Chentianqiao
Clearly this particular privatization is running into some trouble, even though investors still appear to think it will close. I would probably agree with that assessment, as Chen Tianqiao, chairman of Shanda Games’ parent, has proved himself quite adept at doing this kind of deal in the past. Still, there’s still a moderate chance the deal could unravel, perhaps around 30 percent, which would spark a sell-off of its shares.
Next there’s the news from Perfect World, which announced it has moved its game development operations into 5 new subsidiaries as part of a restructuring of the unit. (company announcement) Perfect World said the move is part of an attempt to drive innovation, as employees of the different subsidiaries will be able to receive stakes in those units as part of their compensation. There’s no additional detail, but I suspect that each subsidiary is probably based around a team working on an individual game. Thus this new scheme will allow individual team members to profit more directly if their game succeeds.
I’ve always been a bit more positive about Perfect World than Shanda, as it seems the former is a bit better managed than the latter. Still, investors weren’t too excited about Perfect World’s new reorganization, with company shares down 0.4 percent after the announcement, even as the broader markets rallied. Perfect World shares rallied earlier this year, but are still now at less than half their levels from 5 years ago. At the end of the day, the company will need more than this kind of R&D restructuring to reverse its sagging fortunes. That needed shot in the arm will ultimately have to come by either getting acquired or finding another major strategic partner like Shanda.
Bottom line: Shanda Games is likely to close its privatization despite the departure of its CEO, while Perfect World will need more than its latest R&D restructuring to reverse its sagging fortunes.
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