Shanda Games falls 14% after raising $1 billion

Shanda Games has raised $1 billion in the largest US initial public offering so far this year. The company, a spin-off of Shanda Interactive Entertainment, ran afoul when it started trading on Friday, however, finishing its first day of trading down by 14%.

The company initially planned to sell 63 million American depositary shares (ADS), but upsized the deal by adding an additional 20.5 million ADS into the offering. This decision, made in the middle of last week due to high levels of demand, increased the maximum base deal size to $1.04 billion, from $788 million.

And the maximum is what the company got; the deal priced at $12.50 per ADS, the top of an indicative range that started at $10.50. A 15% greenshoe could increase the final deal size to $1.2 billion. Each ADS represents two Class-A ordinary shares.

The deal was 10 times covered with approximately 70% of the institutional investor buyers based in the US. The remainder was split between Europe and Asia, with some demand from the Middle East. Investors predominantly came from the "highest quality" long-only funds. There was also significant interest from existing shareholders in Shanda Interactive. However, they weren't selling their stake in the parent and transferring their exposure to the subsidiary, rather they were increasing their absolute position in the Shanda online empire.

The price values the company at 12.9 times its 2010 projected earnings, which puts it on a par with other Chinese online gaming companies, like Changyou.com and NetEase.com, which are trading at around 12 to 14 times 2010 earnings.

Everything was going well up until the stock started trading on the Nasdaq global select market on Friday. The shares in the parent company were even up 16% during the bookbuilding process. But when trading commenced, things stopped running so smoothly and, by the end of the first day it was down 14%, suggesting that either the deal was overpriced or the upsize satisfied the demand a little too much. Shanda Interactive also dropped on Friday, finishing the session 11.9% lower.

The debut was in stark contrast to another US listing last week. A123 Systems, a car battery producer which raised $380 million in a Nasdaq IPO, rose 50% on its first day of trading on Thursday.

Despite Friday's poor performance, investors will still be hoping that in the long-term Shanda Games can imitate some of the success of Changyou.com, another Chinese online gaming company that listed in the US earlier this year. Even though Friday was a tough day for Changyou.com too -- it fell 2.80% -- the stock is currently trading at $37.23, more than double its April IPO price of $16.

Shanda Games is the online gaming arm of Shanda Interactive Entertainment. By spinning off the games business, the parent has created a pure-play gaming company. Shanda Interactive will now focus on establishing a broader online media business. The parent company will keep Shanda Online, a platform upon which Shanda Games and third-party game developers can host their games, and Shanda Literature, a network for gamers to discuss their favourite games.

Goldman Sachs and J.P. Morgan were the joint bookrunners for the IPO.