Chinese Internet firm adopts ‘poison pill’ to defend against takeover

If Shanda Interactive Entertainment Ltd., China’s largest provider of online games, wants to acquire Chinese online media company Sina Corp., it’s going to have a fight on its hands.

That was the message Sina’s management sent Tuesday when the company announced provisions of a shareholder rights plan — also known as a ‘poison pill’ — intended to head off a takeover bid by Shanda.

Last Friday, Shanda announced that the company, acting together with related companies, had taken a 19.5 per cent stake in Sina by purchasing Sina shares on the open market for US$230 million. At the same time, Shanda announced the purchases were a strategic investment and said it may pursue a merger with Sina.

A merger between Shanda and Sina would create the biggest Internet company in China and reshape the landscape of this hotly competitive market. Together, the two companies would create an Internet giant that would be number one in China’s Internet gaming, online advertising and wireless value-added services markets.

Goldman Sachs Group Inc. estimated that a merger between Shanda and Sina would create a company with around US$470 million in revenue during 2005 and net income for the year of US$176 million. The combined company would not only dwarf every other Internet company in China but also be bigger than any two competitors put together, according to a research note published by the investment bank on Tuesday.

The closest rival of the merged company would be value-added services provider Tencent Inc., which Goldman Sachs estimated will earn 2005 revenue of US$160 million and net income for the year of US$58 million.

Following Friday’s announcement that Shanda had taken a nearly one-fifth in Sina, Sina issued a statement saying the company’s management would review details of the announcement. Now, that review appears to have ended and the company’s management seems determined to fight a takeover bid by Shanda.

According to the terms of the shareholder rights plan announced by Sina, each shareholder will be granted a right that can be exercised if Shanda and its related companies purchase a further 0.5 per cent of Sina’s outstanding ordinary shares, raising its stake to 20 per cent.

If Shanda does purchase an additional 0.5 per cent in Sina, other Sina shareholders will be able to purchase additional shares from Sina at half price, according to the terms of the plan.

Even if Shanda does not make an attempt to acquire Sina, the company stands to make a handsome profit from its investments. Goldman Sachs estimated that Shanda’s stake in Sina was worth a profit of US$50 million, as of Feb. 22.