Chinese cultural commentator Wang Xiaoshan makes no secret of his opposition to any takeover of Sina, the country's biggest internet portal, by the leading online games operator, Shanda Interactive Entertainment.

Mr Wang has changed his Microsoft Messenger user name to “Defend Sina, Defend the Homeland”, following last week's announcement that Shanda had bought a 19.5 per cent holding in its Nasdaq-listed rival for US$196m.

“I became a resident of Sina soon after I first went on the web, and my feelings for Sina run very deep,” Mr Wang says. “I feel hurt, really hurt.” For all Mr Wang's sorrow, Shanda's stock market raid and Sina's subsequent decision to introduce a poison pill have placed decisions on the fate of the portal firmly outside China.

For the first time in the history of the country's fledgling capital markets, two leading China-based companies will battle it out under rules dictated neither by the Beijing government nor domestic regulators but by Nasdaq investors.

As one Hong Kong investment banker said: “The beauty is that Sina's shareholders will be in control of the company's destiny.”

This novel situation will have profound implications for both Shanda and Sina, which will have to contend with an unprecedented level of scrutiny from regulators, and interest from aggressive investors such as hedge funds.

It could also radically change Chinese companies' commonly-held perception of an overseas listing as an easy, risk-free way of raising money from cash-rich foreign funds. The confrontation between Shanda and Sina is a reminder that, by tapping overseas investors, Chinese companies may leave themselves open to takeovers.

However, some experts pointed out that Sina was an exception as it had a fragmented shareholder base with no investor holding more than 10 per cent before Shanda's move.

The two other leading China-based portals on Nasdaq Netease and Sohu have controlling shareholders, while many other Chinese companies with overseas listings are controlled bythe state.

Sina shares have risen more than 23 per cent to US$28.42, valuing the portal at US$1.4bn, since Shanda paid US$23.17 per share to buy the bulk of its holding earlier this month.

Shanda's shares, by contrast, have dropped slightly, to US$29.32, since it announced it had become Sina's largest shareholder, valuing the online gaming group at US$2.1bn.

“A real indicator of whether the market likes this deal will be the combined market capitalisation of the two companies is it higher or lower than before Shanda's actions?” said a senior Hong Kong-based banker. The market's true reaction is unlikely to become clear for at least another week after the first round of hedge fund activity. In the first few days of a potential cash and share bid, arbitrageurs typically buy the target and short, or sell, the acquirer, triggering artificial moves in both share prices.

And if the talks stall, Shanda could attempt to go to shareholders behind Sina's back, launching a proxy fight that could lead to a hostile bid.

Also, although the poison pill announced by Sina would neutralise any further share purchase by Shanda, would-be allies of the online gaming group could buy more shares in Sina to force the board's hand.

Wednesday's announcement by Stone Group Holdings, which was Sina's biggest shareholder but has cut its stake from more than 20 per cent in early 2003 to just under 5 per cent now, could give them an opportunity.

The Hong Kong-listed Chinese conglomerate said on Wednesday in a filing to Hong Kong regulators that it proposed to sell the remainder “when appropriate”. As veterans of US takeovers, and players of online adventures know, the road between the start or play and the end-game is full of twists and turns.

● Netease released results highlighting the upside of combining online games with portal services such as news, entertainment and wireless messaging.

Netease, the first of China's portals to develop strongly “massively multiplayer online role-playing games” said its net profit rose 19 per cent to Rmb130m ($15.7m) in the fourth quarter of 2004 compared with the previous three months, on 10 per cent sales growth.

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