Gamasutra: The Art & Business of Making Gamesspacer
View All     RSS
April 23, 2014
arrowPress Releases
April 23, 2014
PR Newswire
View All





If you enjoy reading this site, you might also want to check out these UBM TechWeb sites:


EA shares lowest since '99 - is it now a takeover target?
EA shares lowest since '99 - is it now a takeover target? Exclusive
May 8, 2012 | By Chris Morris

May 8, 2012 | By Chris Morris
Comments
    27 comments
More: Business/Marketing, Exclusive



Electronic Arts has been the rumor mill's favorite grist for years -- but in recent weeks, the company has found itself the subject of even more whispers than usual.

Reports that Nexon was planning a bid for the company proved to be a significant misunderstanding by a major news outlet, but with the company's revelation Monday that subscribers to Star Wars: The Old Republic are leaving at an alarming pace and that the future earnings outlook is tepid, those takeover talks may be resurrected.

EA shares are taking a hit today on yesterday's revelations -- down some 6 percent (which, admittedly, is better than the 10 percent drop that came in after-hours trading yesterday). Shares opened Tuesday at $14.25, a level the company hasn't seen since July 1999. In the past five years, EA shares have lost nearly 70 percent of their value.

A lot of that loss is tied to the broader economic downturn, but there's plenty of blame on EA's side. While it has had its share of hits, it hasn't published a new category-defining title for a long time -- and it has lost several strong members of its management team to companies like Zynga. Meanwhile, the publishing side of the business -- the bread and butter for any traditional game company -- continues to be battered by sluggish retail sales.

There are some advantages, though. EA has bet heavily on digital distribution and has expanded its focus into other areas, such as mobile, that are starting to show payoffs. The numbers speak for themselves: In the first fiscal quarter of 2011, EA recorded digital revenue of $209 million. In the second quarter, that jumped to $216 million, then $377 million in the third quarter. And it wrapped up the year with $425 million in digital revenue.

That speaks well for Origin, which (with 11 million registered subscribers) is still dwarfed by Steam, but still produces a healthy income (generating $150 million in 10 months).

Also, while EA could be pointed at as one of the reasons mobile and social developers are being paid astronomical amounts of cash in today's buyouts, it has finally realized the ridiculousness of those valuations and isn't likely to be jumping into the fray again soon.

"We don't need to buy a brand just to get a temporary lead on top of the charts for whatever is hot this quarter," said CEO John Riccitiello on yesterday's earnings call. "That doesn't mean that we would never buy or never invest. We would. But right now, what I'm starting to see is valuation expectations that assume that these things are all hockey stick moving up into the right with no end in sight, and I think those are bad assumptions."

So there are definite pros and cons to the company. The question is: Does this make it an attractive target for potential buyers?

The answer is yes -- and no.

Unlike THQ, EA is a company that has a lot of successful franchises that it owns outright. And, unlike some publishers who largely focus on a single genre, it's diversified, having seen success in sports, action, RPGs and more. Couple that with the depressed stock price and it's virtually impossible to imagine no one is contemplating a bid.

Forget other U.S.-based publishers. Only Activision Blizzard would be in a position to even contemplate a bid these days, and even casual observers of this industry know how unlikely that is.

Overseas publishers, though, are more cash rich, and could be viable candidates. Adding EA to their holdings would give them a strong U.S. presence and help them expand their properties into North America.

But I keep coming back to major entertainment conglomerates as the most likely suitors. Fox is making a new push into gaming as it embraces the transmedia lifestyle, and EA has several IPs that have box office potential. And Disney could easily integrate the other EA Sports franchises into ESPN as thoroughly as it has woven Madden into the network. (Plus, EA's increased digital focus would mesh nicely with Disney Interactive Studio's current mission.)

Not everyone agrees, of course.

"The major media companies wouldn't touch it with a 10 foot pole, because they don't want to be associated with the volatile earnings of a video game company," says Eric Handler, senior equity analyst for MKM Partners. "They're all going social now, they don't want to deal with console games."

The hurdles for the deal, though, are substantial. EA has over 331 million shares outstanding -- meaning any bid would have to be enormous to be seriously considered. It's unlikely the company would seriously entertain anything under $25 (which is about a valuation that's roughly 64 percent over its stock price -- the same premium EA offered Take-Two in 2008).

Any takeover would also likely hasten the exodus of senior management. And while it's fun for gamers to take shots at EA, the company has an experienced executive suite -- something that's helpful in a rocky period (even if execution by that team has been spotty at best recently).

So is EA a takeover target? In the short term, that's unlikely. The cons outweigh the pros and there are a lot of uncertainties looming in the next couple of years. (Will the next generation consoles help the company rebound? Will the digital initiative continue to bear fruit? Will the increased focus on mobile, social and free to play boost the bottom line?)

But EA is a company that has failed to deliver for its shareholders again and again. Analysts are still acting as apologists for it, but even they are showing signs of frustration. With a few key stumbles and another major hit to the stock, EA could find itself fighting to remain in charge of its own destiny.


Related Jobs

Blur Studio
Blur Studio — Culver City, California, United States
[04.23.14]

3dsMax FX Artist
CCP
CCP — Reykjavik, Iceland
[04.23.14]

Visual Effects Artist
Square Enix Co., Ltd.
Square Enix Co., Ltd. — Tokyo, Japan
[04.23.14]

Programmers
SOAR Inc.
SOAR Inc. — Mountain View, California, United States
[04.23.14]

Game Designer/Narrative Writer










Comments


Benjamin Quintero
profile image
Wouldn't it be funny if Take-Two bought EA? Irony!

k s
profile image
@sinister Mephisto I doubt Nintendo or apple are interested and sony just doesn't have the capital, MS might but I still think that's a long shot.

Gerald Belman
profile image
They're still doing better than Zynga at this point.

Cooler heads often prevail.

It's amazing how EA finally makes a profit and everyone starts talking about how crappy they are doing. But look at the other games companies.

EA had 17 cents EPS - that's higher than Acitivision-Blizzard has had the last two quarters - 13 and 9 cents a share.

17 cents a share is higher than than the 16 cents a share Take two had in the last quarter(ending in Dec.).

Zynga hasn't had any EPS as of yet so don't start talking about your mobile/free to play/microtransactions Bullzenshitten.

So why target EA. You writers need to look a little better at your numbers I think - who is honestly implying that this is a possibility?

EA is surviving. That is the important thing right now - just like most other large game companies (Konami is killin' it but that is an exception). You can say that you think EA's stock is crap and will go down. But to imply that they are the target for a takeover seems extraordinarily premature to me. IF there is a takeover, that would probably be really good for their stock though. But honestly, who's got the money? And Disney publishing a game like Bulletstorm/Mass Effect. I don't think so.

Fox would have too many dullard conservatives complaining about game violence.

Both are highly unlikely.

Bruno Xavier
profile image
"Bullzenshitten"...
I like the way that sounds. lol

Damien Ivan
profile image
Obviously, it's *because* of EA's low stock price that people see them as a potential takeover target. EPS is irrelevant. If anything, higher EPS would make them a better target. Do you even understand how stocks work?

Gerald Belman
profile image
I'm actually going to do you the favor of explaining to you why you are wrong.

One of the things they got right in the article was that the day-to-day trading price of the stock is NOT the same as the take-over price of the stock. Oftentimes they are quite different. Oftentimes they go in different directions.

The take-over price of a stock is determined by the core investors(as well as but to a lesser extent by the day to day trading price of a stock). The core investors are a more reasonable groups of people. They pay attention to the actual numbers of the company(such as EPS).

These core investors are going to feel quite a bit more emboldened by the significantly increased earnings of the company. They are going to be a more entrenched group to buy out because of this. We put the earnings on a per share basis because it helps us to compare between companies of significantly different sizes.

You see, the core investors are going to be looking at the actual numbers of the company. The EPS. They are a little more reasonable than the people who get skittish and are willing to sell for 14 dollars or whatever the current trading price of the stock is.

Positive earnings are almost always important in staving off takeovers. To take over a company, you have to convince a large portion of the owners(stockholders) to sell. That is going to be harder to do if they have decent financials.

Damien Ivan
profile image
My point wasn't that EPS aren't relevant in the greater scheme of things — of course they are. But no one would pay $25 per share for a stock that has fallen to $5. Good EPS could allow for a premium, but there is a limit to that premium.

Gerald Belman
profile image
But it hasn't fallen to 5 dollars per a share. Not yet anyways. You see you are inventing numbers.

If the stock had fallen to 5 dollars per a share AND the EPS (earnings) had gone dramatically negative then yes I would have started to worry more about a takeover.(although seriously who has the cash? at least inside the game industry) But that hasn't happened and I don't think it will.

IF the earnings were negative then the core investors(the people who really believe in the company and control it) would probably be more likely to sell. But as long as the management is seen as effective and the company is making money then there really is not much motivation for a takeover(or for the current management to give in to a takeover). EA currently has over a billion dollars in cash and cash equivalents so this entire discussion is a little bit ridiculous.

Ian Uniacke
profile image
The only point I'd like to make is that Nintendo definitely has the cash to attempt a takeover of EA. Around 10 billion dollars last I read. But I don't see Nintendo doing this because a) they like to have a buffer to get them through the hard times and b) I don't see that this would necessarily create any synergy to improve their business.

Nicholas Lovell
profile image
You can't compare EPS between companies. It's dependent on the number of shares in issue as well as the earnings.

That's why investors use p/e (price earnings ratio).

Although professional market participants tend to use EV/EBIT or EV/EBITDA to take into account the amount of cash or debt that a company has.

Gerald Belman
profile image
@Ian - Nintendo is a private Japanese company so any number that you choose for Nintendo's cash accounts is speculation(unless you have non public information). I would imagine you are correct though and they have alot - but I don't think their company style would jive very well with EA.

@Lovell - I said it HELPS to compare between companies of different sizes. EPS is not the magic financial number to compare one company to another. That number doesn't exist. But you will find a correlation between a company's size and the number of shares that it has issued. There are exceptions to this like Apple and Google, which havn't had a stock split in a long time.

But small companies tend to have a smaller number of shares. Large companies tend to have a larger number of shares. This is because as companies get bigger they often split their stock repeatedly.

For example, ATVI has roughly 3 times the shares as EA and you will notice it has roughly 3 times the total asset value on it's balance sheet. It is a coincidence that it is this exact but the general rule holds true. Take a look at take two and you will notice something quite similar.

Price/Earnings is not comparable between companies' performance because like I mentioned before it is based on the fluid nature of the trading price of a stock.

Any kind of EBIT number is not the magic number because interest and taxes are important costs of doing business(even though they are somewhat out of your control). Computing this ratio is much more complicated as well, but you are correct it is sometimes preferred because it provides a normalized ratio for comparing the operations of different companies. Although even it has some drawbacks.

Like I said before, there is not a magic number. The entire financial statements must be considered. Professional investment analyists have large spreadsheets that they pump financial data into and it compares every number to every other number and flags it as good or bad or ok(etc.) and comes up with a score. They are constantly improving/refining their methods.

But EPS is a readily accesible number, with a standardized calculation, that is simple, and that is a rough indicator of a company's performance. That is why it is the bottom line on google finance and that is why I used it.

Damien Ivan
profile image
Yes, obviously I manufactured the $5 per share number. I was *again* making the point that EPS aren't in-and-of-themselves important compared to the share price.

As I said, "Good EPS could allow for a premium, but there is a limit to that premium," which I why I pulled out the $5 a share number. *If* the stock were to drop to that level, the 64% premium mentioned in the article (actually, it's more like 75%) would become a 500% premium.

But you keep going on and on about EPS as if they're more important than share price when it comes to a potential takeover bid, which is the *whole point of this editorial* — speculation about whether someone might want to buy them. And who has the cash? Obviously someone outside of the "game industry" — Apple makes sense in some ways — they have the cash and the platform — although I seriously doubt they actually would buy EA.

And since when does the board have to approve a hostile takeover? Would that be difficult? Of course. But if the price goes low enough, anything is possible; and I'm sure individual investors would be far more interested in giving up their shares if things were to go further south than they already have — again, *the whole point of the article*.

Alan Youngblood
profile image
The AAA/Console bubble is bursting. Sad that the US/EuroZone financial markets have caused just about every other market in the world to go belly up.

That being said and after all the flak EA catches, I agree that their mgmt is better than the previous CEO/mgmt and still better than ATVI's. Investors could benefit by standing by their decisions to support companies, even when the profits dip for a quarter or two.

Dave Smith
profile image
thats a long lasting bubble!

Richard Carrillo
profile image
It's not bursting, it's just oversaturated. With the amount of sales COD gets it's obvious that the market is still there and will be there for a while. But shipping more games doesn't mean more sales. Many companies have been trying to turn all their games into action blockbusters instead of focusing each game on a genre and owning that market.

Nicholas Lovell
profile image
I am someone who loves using the word "bubble", but AAA/console is no bubble.

It's a old world business, rooted in physical distribution, which is struggling to adapt to a digital age, just like music, movies and books.

But it is not and never has been a bubble.

William Johnson
profile image
What good news. Maybe there will be a massive restructuring inside EA and they're begin to focus on building up good will with gamers again. You know, maybe get rid of online passes, put games back on Steam, less intrusive DRM, free DLC, drop the price of DLC over time, allow people to buy DLC with money and not points(e.g.Bioware Points), stop closing down servers after only 2 years, bring back some old beloved IPs, allow their developers to work on new original titles, not just clone game mechanics from an established series and slap a new paint of coat on it, stop abusing their branding(e.g.Bioware Victory), stop abusing free-to-play(e.g.any of the FTP Battlefield games), stop having useless paid services(e.g.Tetris on iOS), etc etc.

That's just a small list of complaints I can think of off the top of my head. But if they want my business back, they need to clean house on their shady practices. Its CLEARLY not working. So they need to stop trying to abuse their customers and build up some good will.

Evan Bell
profile image
Clearly huh? Best quarterly report in 3 years qualifies as clearly not working. The stock price is not reflecting EA's fiscal performance.

kevin Koos
profile image
"The stock price is not reflecting EA's fiscal performance. "

Because the stock market and stock price is FORWARD looking. And the street doesnt see a lot to be excited about and i dont blame them

Dave Smith
profile image
not so sure the stock market can even be relied on for that anymore.

Nicholas Lovell
profile image
Hurray for that comment, Kevin. Whether EA has the best result it's had for years is irrelevant to the share price. It's whether it beat expectations, and what the market thinks will happen over the next 2-3 years.

Bill Dugan
profile image
> In the past five years, EA shares have lost nearly 70 percent of their value.

This line is one of those attempts to inject drama into a news article. The article would have been more fair if instead of the above, it had said that EA shares have been essentially flat for the last 3 years.

Joe McGinn
profile image
~puts on evil genius hat~

Microsoft should buy them. EA still has enough clout in the console world, it would be the death of the PS4.

Michael Rooney
profile image
The problem with that though is that the entertainment/devices division of microsoft is a pretty small piece of the company. They'd have to be able to justify increasing their game division that significantly to their stock holders after they'd been cutting back on it for the past 5 or so years.

It would definitely be a huge power play, and it would definitely hurt the PS4 a lot; it just may not be beneficial to microsoft either :p

Evan Bell
profile image
I see this kind of acquisition might attract the attention of US regulators since EA has almost complete control of major sports titles in the US.

Joe McGinn
profile image
True Evan, true - but when has that ever stopped Microsoft? This is the biggest software company in the world built on illegal OS bundling ... for which they got a slap on the wrist. A few hundre mil in penalties is a small price to pay for a defacto monopoly.

John Flush
profile image
I don't buy EA because of their business practices. If someone takes them over hopefully they change the direction otherwise I don't care who owns them.


none
 
Comment: