Why Shanda Games Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Shanda Games  (NASDAQ: GAME  ) fell 20% today after the company announced an acquisition.

So what: The company will buy affiliates who provide user and payment platform services from Shanda Interactive for $811.5 million. Management says it will lower costs and improve earnings by about 40% to 50% going forward.  

Now what: The big question is whether or not Shanda shareholders are paying too much for these assets. The company hasn't been able to grow earnings over the past three years, and now it's spending cash that may reduce the risk of falling earnings to acquire an affiliate at over half the value of Shanda Games itself? The company will also have to take on a significant amount of debt to complete the acquisition, and I don't think it will help the stock in the long term at all.

Interested in more info on Shanda Games? Add it to your watchlist by clicking here.

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