Deal Shakedown

The story takes place in modern time. The characters involved are as follows:

Electronic Arts
Big game company, which thrives for domination of industry

News Corporation
Media conglomerate which plans to dominate game industry

Activision
Mid-size game company, which is fighting for survival

Eidos
Big game company, which is in financial troubles

Infogrames
Big game company, which is in financial troubles

Vivendi
Big game company, which is in financial troubles

UbiSoft
Big game company, which is under acquisition threat

The story so far:

Electronic Arts has been growing steadily, relaying on good quality gaming content and far reaching business decisions, like buying sole-rights to create game content, which is based on well known brands. Everybody is afraid of the Electronic Arts, since the company’s cash reserves top most other game companies market valuation. It would be easy for Electronic Arts to eat up any competitor and eating competitors is exactly what it has been doing to gain its position as the biggest game company.

Competitors like Eidos, Infogrames and Acclaim are all in some sort of financial binge. However, except Acclaim, these companies are not in a serious trouble but enough for investors to be careful while investing their money. Then there are those game companies, which are doing bit better. These companies include UbiSoft and Activision. Just like the big Electronic Arts, these guys desperately want to grow bigger so that they are able to survive the hard competition.

Electronic Arts, being the humongous goliath it is, goes around and picks the companies and intellectual rights, which fit into its plan. It uses financial muscle to push out smaller competitors and relies to every possible business tactics while doing it. Poor competitors are too focused on the games that their companies make to realize what is going on, until it is too late. Now, nobody can beat Electronic Arts head on, it is just about survival as an independent company.

Everybody is under the magnifying glass of the Electronic Arts, financially sound companies are especially tempting for Electronic Arts, because the fact that they are financially sound means that they are well managed and there will not be any managerial problems after the deal is made. Buying a company of some financial distress gives their products and rights, but also assimilates their financial difficulties. It takes time to extinguish all the small fires, because the bought company, even if their debt is paid off, will still have to straighten its ways to climb back to acceptable profitability. What if there are some problems with the management, after all they are at least partly responsible for the present condition of the company. It is quite risky, to go about and buy companies in distress. This is the background setting on which the companies are working in. Everybody is setting up tactics to evade unwanted mergers or acquisitions. Let’s take a closer look to the players, starting from the bottom.

Acclaim operated in much the same way as Electronic Arts. The only problem was that while buying publishing rights is expensive and easy, developing good titles based on those rights is expensive and hard. Acclaim wasn’t able to keep their act together and after 17 long years, finally slipped into bankruptcy. The sale of their assets will bring lots of small surprises as the competitors are fighting for the corpse. UbiSoft just lately snatched the publishing rights for mobile Bard’s Tale, which was the previous publisher.

Eidos started the amok by announcing its interest to find a buyer during the summer/spring 2004. This former pet of the stock markets had had some rough times and maybe the managers wanted to bail out, as the stock price was still relatively high. From that day on, there have been some ups and downs on Eidos’ way, but the trend is clear, nobody emerged as a valid buyer and the stock price has plummeted. Company has recently had some difficulties in their publishing schedules, which has resulted in some financial losses. The near term future looks quite challenging as the new titles are coming to the markets during the second half of the year.

Infogrames is relatively big company so it doesn’t need to watch behind its back as frequently as its smaller competitors. However, Infogrames has tremendous outstanding debt that makes it difficult for the company to make rapid changes in its business strategies. Heavy debt also helps Infogrames to keep its independence as nobody likes to buy debt. Board just accepted the suggested model to restructure the debt and now the company has managed to buy itself more time to settle the finances.

UbiSoft is a European game company, which has done everything correctly, except managed to attain satisfying financial success. It steadily puts out good titles and has grown steadily, but somehow stockholders are still unable to get satisfying interest for their investment. This company could be a nice target for company that has money and great management, which could find a new way to gush money.

Activision is almost like a small copy of the Electronic Arts. Activision is well managed and while it doesn’t pack vast amount of famous titles, it does have fare share of hits and success. The best thing in Activision is that they often manage to avoid complete flops, which is increasingly important on these days of increasing production costs. Activision has money and therefore desirable target for anyone shopping a game company that can pull its own weight. Activision has to get rid of extra cash to make some use of it and decrease the likelihood of hostile takeovers. It shouldn’t come as any surprise when they announced that they are buying a game development company.

News Corporation is big, transnational media company, best known of its Fox News. They have massive free cash reserves and are looking to expand into maturing game markets. Nobody is safe but Electronic Arts, which stock price is far above the rest.

Now lets see how this board is going to play out. It was old news that Eidos is on sale and Acclaim is in the gutter. What really sparked the speculation was the unexpected move from Electronic Arts. They secured about 20% of UbiSoft stocks. Electronic Arts calls this move a protective action, in which they just try to make sure that nobody else would snatch that tempting stack of shares. Furthermore, they claim that they are going to be good shareholders, meaning that this is not a launch for hostile takeover of UbiSoft. You know the drill, just shopping around for any spare stocks of our competitors... hah, company has to use money so that it benefits the stockholders. That is the reason, why there is more to this purchase.

UbiSoft panicked and called for assistance from all directions - Vivendi, Infogrames and French government - as nobody returned the call, they were determined to make it on their own. Rumors were in the air that Guillemot brothers, who own and manage UbiSoft, would bring their other game company Gameloft into a rescuing merger. That didn’t happen - I guess they just wanted to secure their money (they are majority owners of Gameloft, but only minority owners of UbiSoft).

While UbiSoft is hatching the plan to fend off Electronic Arts, they stall possible acquisition as much as they can. They try to stay in the limelight and put out press releases and tell about the good “new” days of glory, which will come soon. Markets weren’t impressed, the stock price was high, but it was more because of acquisition speculation. Finally came the day that we all have been waiting for – Q3 press release and phone call for analysts and investors (about week ahead of schedule – someone is rushing things).

UbiSoft did exceptionally well with their titles, but the revenues were lower than year before, because company had to postpone some of their titles after the Christmas season. However, they believe that this accounting year will outsell previous year by about ten percent. This means that they better have some stellar Q4, as the Christmas sales didn’t bring that much to the cash register. They could make it, since there are some good titles coming out from their best development teams.

The real news was that there is no news on the case of Electronic Arts. But there are some innuendos on the markets. Yves Guillemot himself spoke to London Evening Standard about not discarding possibility of buying Eidos as a defensive measure against Electronic Arts possible bid. The other tactics for defense is of course the steroid treatment of stock price. UbiSoft gave very optimistic estimates for year 2005/2006 that should support the stock price for a while and make it more expensive for Electronic Arts, should they move on with possible acquisition. This could backfire badly in about year if UbiSoft is unable to meet the estimates. Electronic Arts is not in hurry, they have money to wait it out.

What about Eidos? Even UbiSoft confirmed that they are still looking Eidos, there is no indication that this deal will ever take place. Now, UbiSoft has more things on the schedule than cozy deal making and buying Eidos. My understanding is that for the moment UbiSoft creates best value for its stockowner by creating good game titles just as they have been doing until now. It is the financials that should get brushed up to please those flickering minds of investors. First they need to put their own base in order, let’s think about those purchases a bit later.

So, can we finally figure out what will happen to Eidos? Well, maybe we can. It looks like UbiSoft is out. Vivendi and Infogrames are out for sure as they have some serious financial troubles of their own. Last thing they need is another fledging developer into their stables. They do serve their owners better if they do what UbiSoft should do – focus on titles, finances and management. It is not Activision either, as they put their money on Vicarious Visions game developer. This leads to the last piece of the puzzle the emergence of News Corporation as possible new entrant to the game markets.

News Corporation has money, it has the will and it has experience on mergers and acquisitions. They think that Electronic Arts is pricey so they might want to consider some smaller bites. Activision, Vivendi, Infogrames, UbiSoft and Eidos are on the line here, probably some others too. To my observation, News Corp. doesn’t necessarily rely on quality instead they will go for size and market coverage. To attain this objective, they will most likely do more than one acquisition (who knows about their timetable, with their money, game market is not going anywhere). In this case, it makes sense to have strong presence on both US and Europe markets. Unfortunately for Eidos, it is not exactly a strong company that could contribute as much as News Corporation requires. So in European end, the choice would be Vivendi, Infogrames and UbiSoft. I guess that Eidos is just stuck with Electronic Arts, which is just abiding its time and waiting the stock price to plummet even further. From those three might be better targets, since Electronic Arts signaled that it is interested in UbiSoft. Competitive bidding might raise the price too high.

In the American end, Activision is the best that News Corporation can do. Activision is like a mini Electronic Arts, very good company and just recently announced excellent sales. However, Activision must have its own aspirations as an independent player on the field as they purchased the game developer Vicarious Visions. Clearly Activision is looking for some bulk to go around and follows the path that it has taken in past with many other game developers that it had worked with closely. Vicarious Visions also brought interesting middleware for Activision as Vicarious Visions has Alchemy middleware technology. This deal will keep Activision trailing Electronic Arts.

Final results: News Corporation might end up with following choices: Activision/Vivendi and Activision/Infogrames. This would arrangement would toss UbiSoft and Eidos into the arms of Electronic Arts. Market would arrange itself like this:

Electronic Arts – UbiSoft – Eidos

Activision – Vivendi/Infogrames

Vivendi/Infogrames

Ok, now there is nothing to do but wait and wait some more.