BioWare & Pandemic: The Fatted Calves?
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At this point, there are a lot of questions to be asked, which probably don't have public answers. Since a private equity firm like Elevation usually recoups its investment via an IPO or the sale of a company, and Wall Street is clearly uncomfortable with public offerings from independent developers, particularly those with high creative standards and long development cycles, why invest in VG Holdings if the plan wasn't to sell the company from the start? How soon did Riccitiello know succession was being considered at EA? If BioWare and Pandemic went into this deal with the desire to receive funding to remain independent, was the lure of an eventual IPO the carrot on a stick that lured down the path to eventual buyout? And, perhaps most importantly, when taking the reins as CEO of VG Holdings, with the promise of merely handling the mundane business operations, did Riccitiello know he was on the short list for taking over the reins at Electronic Arts? In short, were BioWare and Pandemic always intended to be fattened and sold on the market, and did the executives who handed the reigns over to Elevation and Riccitiello know?
There's a lot of room here for conspiracy theory, but it depends on the executives at BioWare and Pandemic being duped and that Riccitiello left EA with plans from the start to land the "big one." It is equally conceivable to suggest that BioWare and Pandemic were simply interested in securing creative freedom and were convinced that by taking the investment from Elevation Partners and putting Riccitiello, clearly a savvy and respected executive, in charge of their business operations they could achieve that Holy Grail. Also conceivable is that things just fell into place for Riccitiello, that on being recalled to EA as its CEO with Probst as Chairman of the Board, he was in a unique position of authority and influence to land two of the strongest names in game development for the publisher. The problem is both of these theories also require the assumption that everyone in the deal assumed Elevation would make its money back on an eventual public offering from VG Holdings, which was widely seen in financial sectors as unlikely.
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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.
