EA stock soars despite deal doubts

Mixed analyst reaction to BioWare/Pandemic deal can't stop publishers' shares from hitting 52-week-high.

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Yesterday, Electronic Arts announced that it would purchase BioWare-Pandemic from Elevation Partners for a grand total of $860 million in cash and other compensation. The initial reaction from the stock market has been positive, as shares of EA were trading up 4.4 percent this morning to a new 52-week high of $61.28. However, the reaction from analysts has been slightly mixed.

In a note to investors this morning, Pacific Crest Securities' Evan Wilson noted that the acquisition gives EA a better foothold in the action-adventure category, but openly questioned the price paid. He noted that BioWare and Pandemic fetched as much as RedOctane ($150 million), Criterion ($68 million), Mythic ($76 million), Bizarre (he estimates $40 million), Havok ($110 million), GLU Mobile ($210 million), and Harmonix ($150 million) combined.

"The price should also raise questions about [EA CEO and former Elevation Partners executive John] Riccitiello's relationship with [BioWare-Pandemic shell company] VG Holdings," Wilson wrote. "While he recused himself from the board for the final vote on the acquisition, we do not think that EA would have acquired VG Holdings without Ricitiello as CEO, or if it did, not for this price. We have not heard from our industry sources that this was a competitive bidding. While the acquisition will benefit Riccitiello to some extent, it benefits Elevation significantly and appears to be a concession to the other partners of Elevation because he left to go back to EA with his work in building a large-scale video game publisher only partially complete."

Wedbush Morgan Securities analyst Michael Pachter also noted Riccitiello's ties to Elevation Partners, saying he stands to benefit up to $4.9 million from the transaction. However, he also said the deal appeared to be fair and notes EA's disclosure of the potential conflict of interest in a Securities and Exchange Commission filing.

"We think that the acquisition, though pricey, will likely pay off," Pachter wrote. "The two studios have averaged almost three games per year over the last seven years, so in order to generate $300 million in revenue, their games will have to average around $100 million in sales, or 2 million units, apiece. Although these are big numbers, we note that several prior efforts were multi-million unit sellers. Should the two studios future performance mirror their prior performance, EA will likely achieve its goal of $300 million in annual revenue."

Lazard Capital Markets' Colin Sebastian didn't directly address whether or not the "significant" acquisition cost would turn out to be a sound investment, but did note that the developers are a "good strategic fit" for the company, and bring with them roughly 800 skilled developers. Nollenberger Capital Partners' Todd Greenwald also acknowledged the price paid for EA was steep, but ultimately said it was a wise use of the company's cash on hand.

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