While the country's youth have fun playing online games, its lawyers are working hard helping the companies who own these games merge, acquire, license and list.
With hundreds of millions of internet users, the online entertainment industry has emerged as a multi-billion-dollar market that is still growing. In 2009, while most other sectors experience a slowdown in deal activity, leading players in this industry continue to enjoy robust growth and push deals through.
In the past few months alone, a number of major transactions have been completed or announced in the online entertainment sector. Deal highlights included the NASDAQ IPO of Changyou.com, the licensing deal between Blizzard and NetEase.com and Shanda Interactive Entertainment's proposed acquisition of a controlling stake in Hurray! (both companies are traded on NASDAQ).
Davis Polk & Wardwell is one of the firms winning a fair share of the work. The firm's Hong Kong partner James Lin has been involved in two of the recent deals, advising the underwriters in Changyou's IPO and Shanda in its acquisition of Hurray!.
"The online game industry is a highly lucrative business," said Lin. "As it is not a capital-intensive industry, if a company can develop a few major hits or have license rights for popular games, it can generate a lot of cash. The trend is that major internet companies, such as Sohu, which were traditionally portal companies and then developed successful online games, will separate their online game business and list it on a stock exchange." Lin expected that the listing model of Changyou, leading developer and operator of online games spun-off by Sohu, will be followed in the next few years. NASDAQ will still be the primary location for an IPO, but due to the September 2006 M&A rules restrict overseas listings, many online game companies will eventually list on domestic exchanges.
Meanwhile, China's lucrative online game and entertainment market will be increasingly attractive to foreign game developers and companies. Korea's Wemade Entertainment, creators of the Legend of Mir series, and Blizzard Entertainment of the US, which developed World of Warcraft, have achieved great success in the China market. However, lawyers largely expect local developers and companies to continue dominating the market.
"US online game companies will actively try to get into China's market, but there are two obstacles for them - legal restrictions on foreign ownership and the competition from local companies, who understand what the market desires and how to tap that interest," said Lin.
With more companies looking to list their online game units and raise capital, it's easy to predict that more consolidation will be happening in this sector. Shanda Interactive Entertainment, listed on NASDAQ in 2004, has established itself as an industry leader with the most diverse portfolio of online games and interactive entertainment content. Its growth strategy has been achieved through a series of M&A transactions and partnerships.
In recent years, the company has acquired the likes of game developer Zona, network game platform Haofang, online game company Gametea, and literature platforms Qidian and Hongxiu. Most recently, it made a tender offer to buy a 51% stake in Hurray!, a leader in artist development, music production and wireless music distribution and other wireless value-added services in China.
To better execute its strategy, the company appointed US-qualified lawyer Thomas Yih, formerly with Morrison & Foerster in Shanghai, as general counsel to head its 15-member in-house legal department in 2007. Yih is assisted by deputy general counsel Jerry Zhang, and assistant general counsels Zhang Qing and Chen Mingfeng. Yih expects the next few years to remain a busy deal-making period for his company and in-house team.
"Following chairman Chen Tianqiao's strategic vision, we've pursued many deals and adopted different deal structures to improve and pursue the company's growth strategy. However, numerous steps remain before the group's business strategy is fully executed," said Yih. The execution of many deals, such as the acquisition of Hurray! and convertible bond issuance, requires a significant amount of US securities and capital market experience and expertise, which Yih brings to the in-house team.
"There are a lot of other deals and things we'll need to do. We expect the next couple of years continue to be very busy as the company continues to expand its platform," Yih said.
It's clear that Shanda's next step is to launch a NASDAQ IPO of its game business, which it plans to spin off. The company announced the proposed IPO in May 2009 and said the move was to help it develop other online entertainment businesses and enable the game division to be more focused.
Davis Polk and Jade & Fountain, two firms that have worked with Shanda regularly in recent years, are likely to be engaged again should the IPO plan go ahead. The two firms advised Shanda on its issuance of US$175m convertible bonds last year.
In addition to M&A and IPO transactions and licensing deals, commercial and IP disputes also arise frequently in this dynamic and fast-transforming industry. The lawsuits filed by The9 against Blizzard Entertainment, for example, have attracted much attention in recent months. Litigation and IP practices will have an increasing role to play in this sector.
The legal services required by online entertainment companies are as creative and diverse as their online businesses. Hence, working as legal practitioners in this sector seems to be correspondingly more exciting and entertaining than most other sectors. "The nature of the legal work we do is no different than in-house counsel in other types of companies. But no two days are ever the same working in this fast-changing environment, surrounded by next-generation technologies, cutting-edge designs and fascinating creativity," said Zhang Qing, assistant general counsel of Shanda.
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