Electronic Arts, Inc. Potential Mergers - Helen Tse

Report
ELECTRONIC ARTS, INC.
POTENTIAL MERGERS & ACQUISITIONS
M&A committee: Kaitlyn Emerick, Jasmine Fortune, Claire Lin,
Patti Mansbach, Helen Tse
Electronic ArtsAcquirer
Kaitlyn Emerick
EA Potential Targets
Akamai
Jasmine Fortune
Ubisoft
Patti Mansbach
Take Two
Helen Tse
Zynga
Claire Lin
Online and mobile is where the
gaming industry is headed
2
1
1
2
EA Transition to
Online and Mobile Games
● Traditional gaming company: Microsoft’s
Xbox, Sony’s PlayStation, and Nintendo Wii
● Popular games: Madden NFL Series,
Battlefield, Titanfall and The Sims
● Acquired PopCap games in 2011 for $750M
○ Big break into mobile and online gaming
○ Market cap before: $8 billion
○ Current market cap: $9 billion
EA Healthy Past
Operating Cash Flows
2010
2011
2012
2013
$152M
$320M
$277M
$324M
EA Cost of Capital
Weighted Average Cost
of Capital
Cost of New Long-Term
Debt
15%
5%
Weight of Long-Term Debt
10%
Shareholders’ Required
Rate of Return
18%
EA Increasing Free Cash Flow
2014
2015
2016
2017
2018
$506M
$308M
$334M
$386M
$453M
Terminal Value
$13B
$13.5B
Critical Assumptions
2013
2014-2018
Sales Growth
-8%
18%
Costs of Goods as % of Sales
37%
33%
R&D as a % of Sales
30%
31%
EA is Fairly Valued
Estimated Value
per share
$28
Current Market Price as
of 4/24/2014
$28
Current Market
Capitalization
$9B
● EA stock will not be used to acquire companies
EA Acquisition Budget
EA Budget
Cash
$1B
Free Cash
Flow
$228M
New Debt
$700M
Total Budget
$2B
Debt Capacity
Current debt: $633M in
convertible bonds due in 2016
with conversion price of $31.74
EA Potential Mergers & Acquisitions
Akamai
Jasmine Fortune
Ubisoft
Patti Mansbach
Take Two
Helen Tse
Zynga
Claire Lin
Akamai Technologies, Inc.
●
● Leading Provider in cloud services
○ Superior delivery
○ Optimization
○ Security content online
● Serves a wide range of customers
Akamai Alta 2.0 May Create $4.4 M
● Alta 2.0: an updated version of web
accelerator solution
● Initial cost: $1.2M
○ Net present value: $4.4M
○ Payback period: < 1 year
Critical Assumptions
Number of solutions sold
Sales growth
Price per solution
Forecasted 2014
1,300
5%
$600,000
Akamai Healthy Past
Operating Cash Flows
2010
2011
2012
2013
$402M
$444M
$530M
$565M
Akamai’s Cost of Capital
Weighted Average Cost
of Capital
Cost of New Long-Term
Debt
20%
4%
Weight of Long-Term Debt
10%
Shareholders’ Required
Rate of Return
24%
Akamai Increasing Free Cash Flow
2014
2015
2016
2017
2018
$665 M
$913 M
$1.6 B
$2.1 B
$2.9 B
Terminal Value
$12.6B
$15.5 B
Critical Assumptions
2013
2014-2018
Sales Growth
15%
22%
Property as % of sales
29%
31%
Akamai Stock is fairly valued
Estimated Value
per share
$53
Current Market Price as
of 4/24/2014
$53
Current Market
Capitalization
$9.6B
Shares Outstanding
179M
Premium 20%
$63
Purchase Price
$11.3B
Akamai will not be acquired
● EA cannot afford Akamai at this time
● Akamai’s estimated share price is too high
Ubisoft is in the European Market
●
● Based in Paris, France.
● 129 offices worldwide.
● Largest is in Montreal, Canada.
● Acquiring Ubisoft could increase cash flows in
the European market for EA.
Ubisoft Will Be a Successful
Cross-Border Acquisition
● Only 17% of cross-border mergers and
acquisitions create shareholder value.
● EA will create incentives for the key people at
Ubisoft to stay.
Ubisoft Voice Over IP May Create €8 M
● Implement a voice over IP system for
international phone calls.
○ Initial cost: €1.5M
○ Net present value: €8M
○ Payback period: <1 year
Critical Assumptions
Euro Per Dollar Rate
Forecasted 2014
€0.75/$
Hours Spend on the Phone
Per Employee Per Year
130
Telecom Company Cost Per
Minute
€0.09
Ubisoft Healthy Past
Operating Cash Flows
2010
€241M
2011
€392M
2012
€358M
2013
€400M
Ubisoft Cost of Capital
Weighted Average Cost
of Capital
Cost of New Long-Term
Debt
19%
5%
Weight of Long-Term Debt
15%
Shareholders’ Required
Rate of Return
20%
Ubisoft Increasing Free Cash
Flow
2014
2015
2016
€484M
€627M
€800M
2017
€1B
Terminal Value
2018
€1.2B
€6.7B
€8B
Critical Assumptions
2013
2014-2018
Sales Growth
18%
25%
Costs of Goods as % of Sales
27%
27%
R&D as a % of Sales
35%
37%
Ubisoft is Undervalued
Estimated Value
per share
€18
Current Market Price as
of 4/24/2014
€13
Current Market
Capitalization
€1.35B ($1.8B)
Shares Outstanding
96M
Premium 20%
€15
Purchase Price
€1.5B ($2B)
Ubisoft could be bought
at a later time
● Ubisoft is not in the online and mobile
industry.
● Just because we can afford to acquire them,
does not mean we should.
● Should invest in online and mobile before we
expand internationally.
Take Two Interactive Software Inc
● Leading developer, marketer, publisher of
video game products
○ Grand Theft Auto (GTA)
○ BioShock Infinite
○ NBA 2k14
Take Two GTA VI May Create $871 M
● Create Grand Theft Auto VI
○ Initial cost: $8.2M
○ Net present value: $871M
○ Payback period: < 1 year
Critical Assumptions
Units Sold
Forecasted 2016
40M
Quality & Assessment
$1.3M
Marketing/Promotions
$535,000
Take Two Improving Past
Operating Cash Flows
2010
2011
2012
2013
$(136)M
$135M
$(85)M
$(5)M
Take Two Cost of Capital
Weighted Average Cost
of Capital
Cost of New Long-Term
Debt
16%
5%
Weight of Long-Term Debt
10%
Shareholders’ Required
Rate of Return
17%
Take Two Optimistic Free Cash
Flow
2014
$177M
2015
$42M
2016
2017
2018
$150M
$192M
$422M
Terminal Value
$2.6B
$3B
Critical Assumptions
2013
2014-2018
Sales Growth
49%
50%
Costs of Goods as % of Sales
59%
55%
R&D as a % of Sales
6%
8%
Take Two is Fairly Valued
Estimated Value
per share
$20
Current Market Price as
of 4/24/2014
$22
Current Market
Capitalization
$1.7B
Shares Outstanding
86M
Premium 20%
$24
Purchase Price
$2.1B
Take Two will not be acquired
●
● Uncertainty to Take Two’s very optimistic free
cash flows
● EA cannot afford Take Two at this time
● EA focusing on online and mobile sector
Zynga, Inc.
●
● Develops,operates, and distributes online
social games.
○ Farmville
○ Chefville
● Possible acquisition because it is in the online
and mobile market.
Zynga New Social Game App Will
Create $18 M
● Launch new social game app
○ Initial cost: $5.5M
○ Net present value: $18 M
○ Payback period: < 1 year
Critical Assumptions
Forecasted 2015
New active users
11M
% of users that make inapp purchase
35%
Zynga Positive Past
Operating Cash Flows
2010
2011
2012
2013
$326M
$389M
$196M
$29M
Zynga Cost of Capital
Weighted Average Cost
of Capital
17%
Cost of New Long-Term
Debt
5%
Weight of Long-Term Debt
20%
Shareholders’ Required
Rate of Return
20%
Zynga Positive Free Cash Flows
2014
2015
$82M
$45M
2016
2017
2018
$121M
$243M
$405M
Terminal Value
$4B
$4.4B
Critical Assumptions
2013
2014-2018
Sales Growth
12%
25%
Expenses as % of Sales
28%
21%
R&D as a % of Sales
47%
42%
Zynga is Overvalued
Estimated Value
per share
$2.28
Current Market Price as
of 4/24/2014
$4.35
Current Market
Capitalization
$3.7B
Shares Outstanding
832M
Premium 20%
$5.22
Purchase Price
$4B
Zynga Could Merge With EA
Why?
● EA does not have enough money to
acquire Zynga
● Zynga is overvalued
Benefits:
● Increase market cap and company value
● Align to EA’s business model
● Only implementation cost
No Acquisitions Will Be Made at
This Time
Company
Recommendation
Akamai
Will not acquire because it
is too expensive.
Ubisoft
Future potential target for
international business.
Take Two
Will not acquire. Firm not
in mobile industry or
international.
Zynga
Will not acquire because it
is too expensive. Possible
merger in the future.
Moving Forward
● Our recommendation is to acquire small
privately held companies because they are
more affordable and will be easier to integrate
into Electronic Arts.
Merger Success
IT can be a powerful factor behind M&A success
2 key points that ensure back-end integration
● Have its own IT in the best shape before initiating
any deals
● As companies begin merger talks, IT leaders should
be involved as well
Principled Leadership
● Communicate regularly
○ Integrated culture
○ Create positive business momentum and
discipline
● Get staff involved
○ Create trust and purpose in the community
○ Allows employees to remain focused and
engaged on the job
No Acquisitions Will Be Made at
This Time
Company
Recommendation
Akamai
Will not acquire because it
is too expensive.
Ubisoft
Future potential target for
international business.
Take Two
Will not acquire. Firm not
in mobile industry or
international.
Zynga
Will not acquire because it
is too expensive. Possible
merger in the future.

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