I asked a financial analyst about the deal, and he was immediately surprised that it was so cash rich for a company with such strong stock versus its cash earning potential, citing the company's unusually high P/E Ratio (price per share over earnings per share). Companies with a P/E above 25 - the U.S. average is between 14 and 16 - usually have stock prices well above and out of step with their corporate earnings and are either thought to have a high potential for future growth or are considered vulnerable to a speculative bubble. EA's P/E Ratio is 720. When companies with that kind of stock valuation make big deals, they tend to keep their cash in reserve and simply issue new stock without any real fears of devaluation.
EA, instead, gave out more than $600 million dollars in cash to make the deal work.
Why? Perhaps Electronic Arts is looking to shore up their new IP development, which includes 13 new IPs since 2002 with Army of Two, Spore and Crysis yet to come, with the strength of VG Holdings' franchises. Certainly Activision, which managed to top EA's earnings in Q1 2007, is making significant money from existing franchises, particularly movie tie-ins such as Spiderman 3, Shrek The Third, Bee Movie and Transformers, taking a page out of what had been EA's playbook. A few analysts have even suggested that EA may be looking to consolidate strong first-party foundation for an eventual attempt to break into the console hardware market. And, certainly something must be said about the feather in the cap of reeling in such a prestige pair of developers.
But in the wake of the deal, we have a lot of uncertain threads to be tied up. We have a pair of developers who went to extraordinary lengths to secure their autonomy, only to end up owned by the largest publisher in the industry. We have the CEO who just happened to land in all the right executive positions to organize the incestuous deal and go from investor to head of the company that bought out his own investment. We have a financial environment that resists as strongly as ever the idea of publicly traded developers unsupported by large publishers, and we have a private equity firm established to help support those developers which has all but abandoned the concept. In the end, the breaking away and eventual reeling back in of Pandemic and BioWare may be as much about reconsolidating the authority of big name publishers as any franchise.
Sean Sands is a freelance writer, one of the co-founder of Gamerswithjobs.com and runs a small graphic design business with his wife near Minneapolis. When not writing about gaming, he can often be found playing video games and pretending to call it work.
