April 2, 2009 / 12:12 PM / 10 years ago

Changyou IPO up 26 percent in strongest debut in a year

NEW YORK (Reuters) - Online video games maker Changyou.com Ltd soared in its trading debut on Thursday, with shares up 26 percent, putting it on pace for the most successful stock launch in nearly a year.

Changyou.com is seen in this screengrab taken April 2, 2009. REUTERS/Changyou.com

Changyou, spun off from Chinese Internet portal Sohu.com Inc, saw its American Depositary Receipts start trading on Nasdaq at $22.02, a 38 percent premium over the $16 price at which the ADRs priced Wednesday evening.

It was only the third initial public offering in the United States since August 2008 and the largest Chinese IPO on a U.S. exchange since December 2007, according to Thomson Reuters data.

In early afternoon trading, the stock was at $20.10 after earlier rising as much as 50 percent.

“If this IPO had come in November when the markets were low, it would have flopped,” said Francis Gaskins, president of research firm IPO Desktop. “It was obviously lifted by the rising markets.”

Wall Street shares were up more than 3 percent in the early afternoon.

Changyou’s chairman, Dr. Charles Zhang, attributed the debut’s performance to the deal’s pricing as well as to the track record of Sohu, which has been listed on Nasdaq for nine years.

“The pricing was based on the environment, and our price-earnings multiple was low compared to others,” Zhang told Reuters in an interview.


The valuation multiple of the Changyou IPO offer price of $16 was about 7, compared to a range of 11 to 13 for rivals such as Giant Interactive Group, Shanda Interactive Entertainment and NetEase.com, and the IPO’s float of 7.5 million ADRs was small.

“It did well because Sohu’s shareholder base is familiar with Changyou as a division of Sohu,” Zhang added.

The only other stock market debut this year was also a spinoff, an $828 million IPO by pediatrics nutrition maker Mead Johnson Nutrition Co, whose shares jumped 12 percent on their first day of trading.

“Mead Johnson had tremendous financials and brand awareness, as do Changyou and (upcoming IPO) Rosetta Stone, meaning that a company meeting those criteria should feel safe attempting an IPO,” said Scott Sweet, senior managing director with research firm IPO Boutique.

Rosetta Stone, a language learning company, is set to price its IPO in two weeks, as is Bridgepoint Education, an education services provider, showing that the IPO market is starting to show signs of a thaw, Sweet said.

The Changyou IPO leaves Soho with a stake of about 70 percent in Changyou, a level Zhang said Sohu planned to maintain, making a follow-on offering not likely soon. Zhang is also chairman of Sohu.

The IPO, which priced Wednesday, attracted orders for 15 times the number of shares on offer, according to a person familiar with the matter.


Changyou is best known for its martial-arts, online role-playing game “Tian Long Ba Bu,” which accounts for about 94 percent of its revenues, and was launched in May 2007.

Analysts have pegged that dependence on one blockbuster as a red flag, but Zhang said the company has three new games in the pipeline with at least one title expected by the end of the year.

Zhang said there are 300 million Internet users in China, and he expects that number to grow to 600 million in five years, bringing millions more online gamers.

“If you talk about video games in China, it’s online games,” Zhang said. “On a global basis, I think the online game will be the future.”

Zhang said Changyou was in the early stages of marketing its games outside China.

The last IPO to jump as quickly as Changyou was Intrepid Potash Inc in April 2008, when it ended its first day up 58 percent. It is now down 37 percent from its offer price.

Changyou sold 7.5 million ADRs, raising $120 million after pricing at the top of its estimate range.

Reporting by Phil Wahba; additional reporting by Gabriel Madway in San Francisco; Editing by Jeffrey Benkoe and Brian Moss

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