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EA to be bought by Nexon? Why the deal "cannot happen" according to Pachter

EA to be bought by Nexon? Why the deal "cannot happen" according to Pachter

Thu 26 Apr 2012 4:27pm GMT / 12:27pm EDT / 9:27am PDT
BusinessOnlinePublishing

Wedbush analyst Michael Pachter labels it a "silly rumor"

EA shares, as noted by Forbes, have been spiking today on a rumor making the rounds that free-to-play giant Nexon has made a bid to purchase the publisher behind Madden, FIFA and Mass Effect. It's an interesting bit of gossip to be sure, but there are plenty of reasons why this one's probably a lot of hot air.

Wedbush Securities analyst Michael Pachter sent us the following assessment on why a Nexon-EA deal would be very unlikely:

Nexon's market cap is around $8 billion, and their CEO owns over 50% of the stock. Float is around $1.5 billion. If they did a stock-for-stock deal for EA at $20 (very unlikely that this would be the price), they would have to issue shares bringing their market cap to $14 billion (assuming they hold their price, also very unlikely), and the CEO's stake would drop to around 30% of the combined entity.

Reasons this won't happen:

1) The CEO will not give up control

2) EA shareholders won't take Nexon shares, because they would likely drop a ton when the float goes from $1.5 billion to $8 billion

3) EA management would recommend against an offer below $25 (where stock traded in October in a weaker market) and likely would reject an offer below $30

4) Nexon would be the acquirer, and would attempt to run a company with $6 billion in revenues that is in mobile, social, MMO and packaged goods, all things Nexon has never done before, at a size 4x their current size

5) EA management would NOT be in control, so the potential for a loss of key employees is huge

6) There are few, if any synergies, and no reason to believe that Nexon could run EA's assets more efficiently. Nexon shareholders would own a completely different company than what they bought in the December IPO

My takeaway is that this deal cannot happen. Nexon couldn't pull off a stock-for-stock deal for the reasons above, and would have difficulty financing an all-cash deal to make EA shareholders happy. If it did, it would have around 50% of its market cap in debt, and there would be a tremendous amount of skepticism about whether Nexon could manage EA's assets any better than EA management currently does.

Silly rumor. Day traders should take advantage, longer term investors should stay put, those uninvolved should wait until the furor dies down. I still love EA stock, but expect this to be denied by its management by the end of the day.

4 Comments

Jack Lee

62 6 0.1
Well, as much as people like to hate on analysts, this is a pretty thorough and incisive summary of the business realities involved in such a deal. Really cuts right through to why it's unlikely. Well thought out, Mr. Pachter.

Posted:A year ago

#1

Jim Webb
Executive Editor/Community Director

2,210 2,051 0.9
Agreed. Pachter nailed this one pretty solidly.

I frankly don't see how in the world a rumor of such implausibility could even be taken seriously.

Posted:A year ago

#2

Raf Keustermans
CEO, co-founder Plumbee

29 2 0.1
Yeah, it sounds unlikely. Still interesting that a 'silly rumor' created such a spike in EA shares (still up 6% now, couple of hours after this rumor came out) - it certainly looks like EA shareholders would welcome a takeover...

Posted:A year ago

#3

Morville O'Driscoll
Games Blogger & Journalist

1,374 1,024 0.7
Rumours like this are weird. For a start, it's massively unlikely (I'm no fan of Pachter, but he has the right of it); because it's so unlikely, you have to wonder how it started. And then, you think, well, this is... financially dubious. People buy at the start of the up-swing, wait for a day or two, then sell when they feel the official denial coming. A short-term profit is made. Not curious at all. No. *raises eyebrow*

Anyways... It happens all the time, in all companies, no matter where they're listed, or what index. A take-over/merger is mooted, and the shares for one or both companies raise (based on what terms are theorised). Unless one of the companies are in serious financial trouble, they only dip down slightly after the official denial is made (if they dip at all).

(can you tell I want to be an analyst and make wild predictions and obvious statements? :p )

Edited 2 times. Last edit by Morville O'Driscoll on 26th April 2012 8:21pm

Posted:A year ago

#4

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