EA Purchase of BioWare/Pandemic is a Wise Move, say Analysts

October 12, 2007 | By: James Brightman

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It's the day after the surprise announcement hit, and analysts have chimed in on EA's deal to acquire BioWare/Pandemic. Most seem to think that EA overpaid somewhat, but in the long run it will pay dividends for the company.

Following the big news about Electronic Arts acquiring BioWare and Pandemic, a number of analysts have weighed in with their thoughts on this huge deal.

For the most part, the analysts have given EA a big thumbs up on the move � it's hard not to like the talent and portfolio of high quality IP that BioWare and Pandemic bring to the EA studio system. "If all performance metrics are met, EA will pay roughly $860 million ($620 million in cash). While the price tag is steep, we view this as a wise use of EA's abundant cash position�EA has nearly $3 billion in cash," said Todd Greenwald of Nollenberger Capital Partners.

While the addition of BioWare/Pandemic would be a boon to just about any publisher, it's an especially good match for EA. "[There's] very little overlap�opens up new genres for EA. Importantly, Bioware/Pandemic's strengths match up very well with EA's weaknesses; these developers excel in the action/adventure/RPG genres, where EA has had a very limited presence," noted Greenwald.

While the consensus would appear to be that EA paid a high price, like Greenwald, most seem to think it's worth it. "Although the price tag is significant, we note that the acquisition provides EA with ~800 additional game developers," said Lazard Capital Markets' Colin Sebastian. "Also, we believe the addition of BioWare/Pandemic provides increasing visibility to peak earnings expectations for EA in the new cycle."

Michael Pachter of Wedbush Morgan Securities agrees that it's a prudent move for EA. "Electronic Arts has finally demonstrated the thinking behind its huge cash accumulation, acquiring two world class developers and several owned franchises while solidifying its market leadership position. The price paid was steep, with the potential for ultimate consideration of well over $800 million, but in buying Pandemic and Bioware, EA picks up several games in development, six owned franchises, and 800 quality employees," he said. "We believe that the Pandemic and Bioware staffs are a good cultural fit for EA, with a solid work ethic (19 games released since 2000), high quality games (an average game ranking of around 80), and sound financial results (several games with over 1 million in unit sales). EA expects the combined studios to generate over $300 million in annual revenue."

Pachter continued, "We think that the acquisition, though pricey, will likely pay off. 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 two 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."

"Over the long run, we think that EA's acquisition of Pandemic and Bioware will pay dividends, and we think that the teams and properties acquired will solidify EA's dominant market position. We note that post acquisition, EA will have less than $1 billion in cash (excluding its marketable securities investment in Ubisoft), suggesting to us that rumors about a potential public company acquisition are unfounded. We believe that EA has made a large bet with its acquisition of Pandemic and Bioware, and expect its future focus for acquisitions to be in Asia," he concluded.

While Sebastian and Greenwald each have a 'Buy' rating on EA's stock and Pachter has issued a 'Strong Buy,' UBS analyst Ben Schachter remains a bit more skeptical. He's taking more of a wait-and-see approach. "[The deal brings] solid studio assets � but questions remain on the financial impact," he said. "While it may be a solid deal for the long-term, we have some questions over the cost, as well as implications for ERTS's strategy. We think investors are hoping for more cost-cutting in near-term vs. increased investment." Schachter is maintaining a 'Neutral' rating on the stock.