PopCap Acquisition 'Good For Both EA And Consumers'

By Colin Tan on July 13, 2011, 2:05PM EDT

EA's purchase of PopCap may have come at a high cost, but analysts believe that the acquisition will be "good for both EA and consumers" in the long run.

"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," said EEDAR's Jesse Divnich.

"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."

Wedbush Securities Michael Pachter noted the high cost, but still believes that the acquisition will fuel EA's growth in the social space: "PopCap makes strategic sense, but EA must really believe the growth profile to justify that price."

"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," explained Pachter. "

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."

Sterne Agee's Arvind Bhatia was less concerned about the price, commenting that the purchase value was more "reasonable" compared to Zynga's initial public offering.

"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."

Source: IndustryGamers

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