EA to Get Into M&A?

As John Riccitiello leaves private equity to rejoin EA as CEO, analysts expect deals to hit the table

In the wake of the news that John Riccitiello would be returning to Electronic Arts, a number of analysts have weighed in on the move, with the majority viewing it as a positive for the leading publisher. In fact, P.J. McNealy of American Technology Research said it's a "bullish sign" and he thinks the appointment sends "a clear signal to the Street that ERTS will become more aggressive in the mergers and acquisition space as the new-generation console install base begins ramping."

McNealy further explained that while Riccitiello was at EA as the COO of the company, EA was very active in making deals. "In the 12 months prior to Riccitiello's departure, ERTS struck deals on multiple fronts, from announcing studio locations in Playa Vista, CA, and Montreal, Canada, to publishing deals with, for example, Warner Brothers, DC Comics, Criterion Software, and Gas Powered Games, to a distribution deal with KOEI. We believe ERTS' pace of deals has slowed down significantly since Riccitiello's departure," he said.

With Riccitiello back at the helm, McNealy expects things to get very interesting for EA. In fact, over the long-term the publisher might even complete an acquisition of Ubisoft or go after a company like Take-Two or THQ. "Our take-away here is clear: Riccitiello has spent much of the last three years scouring the digital media landscape for investment purposes, and we believe he can now leverage ERTS' balance sheet (over $2.5B in cash, cash equivalents and short-term investments). We expect likely targets to include a) partners for distribution in China, b) opportunistic development team acquisitions, c) casual games developers to expand beyond Pogo, and d) larger, longer-term possible targets such as UBI, Take-Two Software or THQ," said McNealy.

Nollenberger Capital Partners' Todd Greenwald also views the return of Riccitiello as a positive. He said that the "timing seems right" since Larry Probst has steered the company for 16 years now and may need a break. Moreover, Greenwald suggests that Riccitiello may be able to drive further innovation at the publisher. "Riccitiello could breathe some new life into EA," he said. "EA has developed a reputation over the past few years for releasing too many sequels, allowing game quality to suffer, and failing to innovate. We believe that will change in 2007, and, if anything, John Riccitiello should accelerate that process. We expect a good deal of new IP from EA this year, including Army of Two, Spore, Crysis, Warhammer, and others. Furthermore, EA is entering new emerging markets such as mobile gaming, online gaming, and Asia, where it should lead and/or gain share."

Colin Sebastian of Lazard Capital Markets believes the move is positive overall as well. However, he noted that it's too soon to make any real judgment on the impact Riccitiello may have on EA's future. "While it is too early to judge what impact there will be on the company (and the executive ranks) as a result of the appointment, we believe Mr. Riccitiello is well respected within the company and the industry. In addition, with the video game industry now emerging from the console transition period, we believe the timing is appropriate for CEO succession at Electronic Arts," said Sebastian.