With little effort, Cisco (NASDAQ:CSCO) raised $6.5 billion in a convertible bond offering this week. It's a good bet that the networking giant plans to use its huge cash hoard to do some deals.
In fact, one deal came to light by way of a Securities and Exchange Commission filing this week: Cisco disclosed that it now owns 13.9 million of Shanda's (NASDAQ:SNDA) outstanding shares, or 9.7% of the total. Wall Street's response, however, was muted -- Shanda's stock price increased just 3.67% to $15.80.
Based in China, Shanda develops massively multiplayer online role-playing games (MMORPGs), which are enormously popular in the world's most populous country. In the third quarter, the company's revenues surged 41.4% to $61.7 million. Net income was $32.3 million, and diluted earnings per share clocked in at $0.44.
So if Cisco is a buyer, should you be, too? Not necessarily. Keep in mind that Cisco has a long-term view on these investments. In other words, Cisco's play does not mean you can expect that Shanda will have a blowout year.
For one, Shanda recently changed its revenue model from a recurring subscription model to a "free" model, whereby customers essentially pay for value-added services instead of game-play time itself. While this appears to be a well-conceived move, it's likely to cause some bumps in the road for the short term. Secondarily, to the best of my understanding, the Chinese government has recently taken to limiting the amount of time users can spend playing games -- yet another potential wrench in the works for Shanda and its relative success.
And besides that, the MMORPG market is still in its emerging stages -- it's critical that Shanda continues to offer cool games to keep momentum going under its new revenue model. Something else to consider: MMORPG requires a tremendous amount of network infrastructure. And yes, this is Cisco's core business.
Basically, it's a good bet that Cisco is investing in Shanda to get better intelligence on the infrastructure needs of MMORPG. How can Cisco make better products? How can it support other MMORPG companies? That's what it wants to find out.
True, Cisco wants to make a profit from its investment in Shanda. But given that this investment is outside Cisco's core networking business, the deal is indeed probably more about understanding a rapidly growing global business that might be a growth driver for the gaming giant.
Shanda is a Motley Fool Rule Breakers selection. Try out the newsletter free for 30 days to see what other cutting-edge companies David Gardner has recommended to his readers.
Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
