Video game giant Electronic Arts Inc. said Thursday that it would buy Pandemic Studios and BioWare Corp. for up to $775 million in cash and stock, which analysts called a record sum for independent game developers.
EA's deal with Elevation Partners, a private equity firm whose partners include rock star Bono, would give the world's biggest game publisher an immediate edge in several genres in which it has been weak: action, adventure and role-playing games.
"This acquisition fills out a gap in our genre lineup," said Warren Jenson, chief financial officer for Redwood City, Calif.-based EA. "This is a powerful combination of creative talent and portfolio strengths."
Los Angeles-based Pandemic is known for its action and adventure titles, including "Star Wars Battlefront," "Destroy All Humans" and "Full Spectrum Warrior."
BioWare should help EA compete in the rarefied world of role-playing games, where only a handful of developers have succeeded. The Edmonton, Canada, studio created "Baldur's Gate" and "Neverwinter Nights."
Its upcoming game "Mass Effect" garnered significant buzz from game critics at this year's Electronic Entertainment Expo in Santa Monica. And it's developing an online role-playing game that would compete with titles such as "World of Warcraft" and "EverQuest."
EA shares fell $1.22 to $58.69 in regular trading but rose to $59.50 after the acquisition announcement and a conference call in which the company said it would probably beat its second-quarter earnings forecast when it announces results next month.
Elevation Partners invested more than $300 million in the two game studios two years ago, wrapping them together in a new company, VG Holding Corp. The development houses employ 800 people between them across four studios in Los Angeles; Edmonton; Austin, Texas; and Brisbane, Australia.
EA Chief Executive John Riccitiello said he stood to profit from the deal. He was a managing director at Menlo Park, Calif.-based Elevation Partners before taking the reins at EA in February. He eventually could reap as much as $4.9 million from the deal as a result of his residual holdings in the private equity firm's $1.9-billion fund, according to EA's regulatory filings.
Riccitiello, in a conference call with analysts, said he had recused himself from the negotiations of the purchase agreement and that EA's audit committee monitored the transaction to ensure "deal independence."
The amount paid per developer is among the highest ever for any studio. Analysts believe the deal is bigger than all but Microsoft Corp.'s $375-million acquisition of Rare, a British developer behind such games as "Conker's Bad Fur Day," in 2002.
EA executives "tend to buy talented studios that know how to manage themselves and demonstrate the ability to develop original franchises," Arcadia Investment analyst John G. Taylor said. "These guys have that in spades. That said, the absolute amount is a little bit surprising."
EA executives said they were willing to pay so much for Pandemic and BioWare because of the dearth of seasoned independent developers whose expertise complemented EA's.
"This is a unique case," said Frank Gibeau, president of the EA Games division. "It's the combination that's generating the value. If you look at single developers, a lot of them have one franchise or they work in one category. When you look at this organization, it's hard to find this combination of expertise in multiple categories, the depth and breadth of their pipeline and their proven track record."
The company valued the deal at up to $860 million. It said it would pay as much as $620 million in cash and as much as $155 million in stock to employee owners of the studios if they met certain performance milestones. EA also agreed to lend Elevation Partners $35 million and assume responsibility for $50 million in employee stock options.
EA predicted that the deal would close in January and cut profit by 30 cents to 40 cents a share in the current fiscal year. Jenson estimated that Pandemic and BioWare would contribute $300 million a year in revenue in 2009 and 2010.
EA generated $3.1 billion in revenue for its last fiscal year, which ended March 31. It had $2.8 billion in cash and short-term investments as of June 30.
"A lot of people have been nagging EA's management to do something with the cash," Taylor said.
Begin text of infobox
Joining the EA fold
Headquarters: Los Angeles
Top games: "Star Wars Battlefront II" (6 million copies sold), "Star Wars Battlefront" (4 million sold), "Knights of the Republic" (3.2 million sold)
Key project: A training simulator created for the U.S. Army became the game "Full Spectrum Warrior"
Headquarters: Edmonton, Canada
Top games: "Neverwinter Nights" (2.2 million copies sold), "Baldur's Gate" (2.1 million sold)
Online community: Nearly 3.6 million registered users
Source: Times research