EA made a huge splash in the digital space this week with the acquisition of PopCap. The deal further strengthens EA's already substantial presence in the digital market, but what do analysts think? IndustryGamers chatted with several to get their takes.
"With the retention of top management and an incentive program to keep key talent, PopCap's acquisition is good for both EA and consumers in the long-term," EEDAR's Jesse Divnich commented.
EA is still far behind Zynga on Facebook, but where does this PopCap acquisition put EA in the overall digital marketplace? Divnich noted that it's hard to quantify that: "In terms of being the #1 digital powerhouse, that is difficult to measure. The digital space is very fragmented at the moment, and aside from Zynga, there really is no clear leader in the digital space. In traditional gaming, the top 10 publishers may make up the majority of physical video game revenue, but in the digital space, you would need to sum the revenues of hundreds of companies to get to a majority."
"PopCap makes strategic sense, but EA must really believe the growth profile to justify that price." - Michael Pachter
Ultimately, the deal should be good for the space though. "The PopCap acquisition is very positive for the mobile and social segment as it adds additional validity to the multiplier used to calculate a company's value. Just knowing that major acquisitions are still occurring in the space is very positive for investors, which will likely fuel additional investments into the space," Divnich added.
Wedbush Securities' Michael Pachter believes the deal will help EA grow a lot, but he appears somewhat concerned about the hefty purchase price, which represents more than 40% of the cash reserves EA has. "PopCap makes strategic sense, but EA must really believe the growth profile to justify that price," he told us.
Pachter added in an investor note, "Today’s acquisition has the potential to be transformative. At the high end of the earn-out, PopCap will contribute more than $343 million of EBIT to EA’s results in calendar 2012-13, or around half of the company’s pre-tax pro forma earnings generated last year. Should the PopCap acquisition approach this level of performance, we believe the money was well spent. On the other hand, at the low end of the earn-out range, PopCap will contribute less than $91 million of EBIT over the next two years, suggesting that EA may have overpaid for an acquisition. In that case, we think investors will be unforgiving, and expect EA management to come under pressure."
Despite some reservations about the investment, he sees the deal as a "long-term positive" and believes it should help EA reach it's goal of $1 billion in digital sales. "Though the costs may be high, the opportunities in digital casual gaming are large and growing much faster than EA’s traditional packaged goods business," he said.
Arvind Bhatia of Sterne Agee is less concerned about the purchase price, which he actually said could turn out to be "reasonable."
"We believe the acquisition of PopCap Games is a good strategic fit for EA and believe the valuation (10-20x estimated 2012 EBIT, depending on future performance) will appear reasonable in comparison to the valuation expectations for Zynga’s upcoming IPO," he said. "The 3 key benefits to EA that we see are: 1) EA immediately becomes the clear #2 in social gaming, which is one of the fastest growing areas within gaming; 2) The deal is expected to be $0.10 accretive to CY12 (FY13) and; 3) Synergies with ERTS’ existing assets in social gaming could be meaningful."
