“An interesting story we’re following, Electronic Arts shares selling off by 4% after an executive for Microsoft said there’s not a possibility of any deal here. There was options activity surrounding that. And shares of Electronic Arts actually over the past couple of days had risen in anticipation. Speculation of a possible deal not going to happen, apparently according to Microsoft.” — CNBC’s Power Lunch 9/24/2009
On Wednesday, traders gleaned to a rumor that quickly leaked through the market that Microsoft (NASDAQ:MSFT) was planning to acquire video game maker Electronic Arts (NASDAQ:ERTS). There was little substantiating the rumors, but options activity turned heavily bullish on EA stock just the same and it finished 9% higher.
Wall Street analysts universally panned the idea, saying that it makes absolutely no sense for a video game hardware producer to buy ERTS because it would put some of its best products in serious jeopardy. For example, EA has exclusive licenses to with the NFL for its Madden franchise, which is a huge revenue producer each year for EA. If this rumored deal were to happen, either Microsoft would produce games for other game consoles from Sony (NYSE:SNE) and Nintendo or more likely the NFL would drop EA to partner up with another game maker. This is just one example, but that sort of issue would make this deal extremely unlikely.
This morning, Microsoft’s VP of gaming stopped those rumors in their tracks and flat out denied any interest in acquiring EA. After prodding from reporters, he would not comment on whether any talks had occurred only that they would are not pursuing Electronic Arts. Not surprisingly, EA’s stock has fallen today but only a few percent, compared to its nearly 10% gain on the rumor. So, the rumor that had analysts scratching their heads has now been exposed for having little substance.
It was apparent that EA was not a good fit for Microsoft, as Wedbush Morgan’s Michael Pachter said, “[It makes] no sense at all. One platform exclusives would likely nullify NFL exclusivity, could kill off all sports and other licenses. EA’s value on one platform is probably half its value to a multi-platform buyer (such as a media company).” So, there would likely be far less shock the rumor was surrounding a Disney (NYSE:DIS), Viacom (NYSE:VIA), Time Warner (NYSE:TWX) or News Corp. (NYSE:NWS). Those major media companies are all more suited to putting out content, making them potentially a better fit.
As far as valuation goes, it is clear that the video game industry has been hammered lately and ERTS is just starting to pull itself out of some tough quarters. We had believed that there was decent value in EA prior to the rumor fueled run up, but at this time we remain neutral on Electronic Arts and are reaffirming our Fairly Valued rating.