Gaming for consolidation

-Contact Thomas Rasmussen

Once considered largely recession-proof, the videogame industry continued its breakdown last week. As part of the ongoing fallout, UK-based Eidos Interactive was picked up for a bargain last Thursday on the same day that Chicago-based Midway Games filed for Chapter 11 bankruptcy. Eidos was acquired for $124.4m by Japan’s Square Enix, which, while successful on its home turf, has long desired a larger global presence. We would note that the purchase by Square Enix was the 11th gaming acquisition so far this year – more than twice the number during the same period in both 2008 and 2007. And with falling valuations and desperate investors deep underwater, we have a feeling that we will see more consolidation soon, with large players involved.

One such major acquirer that has not been coy about its M&A intentions is Disney. The entertainment behemoth has been making large inroads in gaming partly through acquisitions, and on a recent conference call addressing its future in gaming, the company said that attractive strategic acquisitions could be in the cards this year. So what might Disney buy? Longtime partner THQ, which has been responsible for the majority of Disney-themed games over the years, is a likely candidate. The Agoura Hills, California-based company has struggled over the past year, watching its market capitalization plunge more than 90% from its 52-week high to just $180m.

But a more interesting – and game-changing – scenario is Disney’s possible pickup of Electronic Arts (EA). The once-soaring company, which used to be an extremely active acquirer itself, could be ripe for the taking. EA’s current market cap is around $5.2bn, down from a 52-week high of $20bn. Disney currently has almost $4bn in cash and a market cap of $33bn. It clearly has the means, and let’s not forget that this is the same company and the same management that spent $7.4bn three years ago to acquire Pixar and cement an overnight leadership in computer animation. We estimate that EA could be had for slightly more than what Disney paid for Steve Jobs’ baby, representing a 50% premium over its current value.