By Perry Wu
In the last couple of weeks, the Chinese investing world got some surprising news. Shanda (SNDA), the upstart online games maker, announced that it had purchased a 20% stake in Sina.com (SINA), the well-established online Chinese portal.

When I wrote a column about the Shanda IPO several months ago, I knew Shanda might decide to squander away its money, but I didn't know how fast my prediction would come true. Fresh from raising upwards of US$200-300 million in both the equity and debt markets, Shanda has now, in the space of a few short months, decided to spend most of the money on a marginally-related company. This is truly remarkable and could even be a world record.

There are two problems with this deal. First, when Shanda did its IPO last year it marketed itself as an online games creator, which it is. The money it asked from investors was presumably to go to developing Shanda's online games. But Sina.com is a web portal. Sure, Sina has an online games business but that is only one part of Sina's company. So Shanda is using its IPO money on something that bears little relationship to its reason for asking for the money.

The second problem is that Shanda has taken real cash raised from investors and decided to use it to buy an over-inflated stock. Even at Sina's current stock price (in the mid to upper $20s), Sina's stock is no bargain, with a market value of around US$1.4 billion. It's like raising money from investors for the privilege of buying $20 bills for $80 apiece.

So why has Shanda acted so boldly? I think the reason lies in classic overconfidence. Since listing in the U.S. several months ago, Shanda's stock price has tripled. Management of Shanda has taken this short-term sign of investor confidence and treated it as a long-term vote of confidence in Shanda's management. Shanda's executives probably feel they can't do wrong. This is a classic case of executives making decisions based on how the stock market is currently viewing a company's stock price, not on what is in the long-term interests of the company.

And when executives get overconfident, there is usually nobody around to stop them. Shanda's investment bankers were only too eager to earn fat fees by helping Shanda acquire Sina's stock in the open market. And Chinese regulators probably don't care too much about what one Chinese Internet company does to another Chinese Internet company.

So who's looking out for the investor? At this point, investors don't seem to care; Shanda's stock price is still double or triple what it was at its IPO. Nothing succeeds like perceived success. But let's see how long this perception lasts. Shanda has now gutted most of its bank account, and its cards are on the table.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.