A new report from the Cowen Group has questioned the high price EA paid for PopCap Games.
The initial amount stands at $650 million in cash and $100 million in stock, but there is potentially another $550 million tied to PopCap's future earnings. If the company fulfills these targets, the deal could be worth as much as $1.35 billion - nearly 10 times EA's predicted calendar year 11 earnings of $140 million.
However, to meet all of EA's requirements, the Cowen Group estimates that PopCap would need to achieve a 45 percent revenue growth rate in CY12 and CY13, with an operating margin of 40 percent on the additional revenue.
The report suggests that, ultimately, the entire $550 million will be beyond PopCap's reach, but states that the price is still, "fairly full given the potential acquisition risk of the deal."
"Since EA was presumably already well-positioned in the social and mobile spaces before the deal... the deal is really about getting access to PopCap's IP, and, more importantly, their development talent."
The report notes that three of the four founders of social developer Playfish have left the company since EA completed its acquisition in November 2009, using it as an example of its "mixed track record" with retaining key personnel.
Cowen concedes that it doesn't regard the PopCap acquisition as a "bad deal", but questions whether EA will be the chief beneficiary from PopCap's future success.
"While social and mobile may be fast growing platforms, we expect a lot of that value to accrue to the platform owners (Apple, Facebook, and Google), with competition getting increasingly stiff between content providers."
The report also notes that, in an earnings call in February this year, EA's CFO Eric Brown told shareholders that, "number one, for the foreseeable future we're not going to entertain large-scale [mergers and acquisitions]."
"The PopCap deal does reopen questions about the ability of investors to take what EA management says at face value," the report states.
Cowen also notes a discrepancy in EA's amended FY12 guidance: estimated revenue was raised by $50 million to $75 million, when PopCap's earnings should add around $80 million to $90 million.
"While this could just be due to conservatism, we wonder if there is a subtle signal here that Star Wars: The Old Republic is more likely to see the light of day in CY12 than late this calendar year."