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Square and Eidos: The History

Rob Fahey looks back at the history of the two companies, and how the marriage was made

The marriage of Eidos and Square Enix is not the pairing which anyone had expected. The list of suitors whose names have appeared alongside Eidos' is lengthy and diverse; Square Enix', right up to the day on which the deal was announced, was not one of them.

Then again, Eidos' tortuous corporate journey over the past five years has never been short of surprises. Once the darling of the City of London and feted as the exemplar of Britain's resurgent creative industries, Eidos' long fall from grace has been marked by sudden reversals and unexpected tangents - not to mention dogged by intense speculation at every turn.

Eidos' Story

The potted history of Eidos will be broadly familiar to most readers. Founded as a video compression and editing technology firm, the company moved into videogames in the early nineties with a string of acquisitions. Most notable among these were Domark - publishers of Championship Manager and Hard Drivin' - and later, US Gold.

One of the major UK publishers of the 8- and 16-bit eras, US Gold had fallen on tougher times in the mid-nineties, and Eidos chose to discontinue the brand entirely. However, US Gold also owned a successful development studio called Core Design - which was already hard at work on the game which would shortly be released as Tomb Raider, with its iconic heroine establishing videogames as part of the "Cool Britannia" cultural resurgence of the nineties and Eidos as a brand which was, for a while, second only to the PlayStation itself.

It would be unfair, of course, to describe Eidos entirely as the House That Lara Built. The firm didn't lack for successful and critically acclaimed franchises - from one of its earliest acquisitions, Championship Manager, through to the likes of Hitman, Deus Ex and Legacy of Kain. However, there's a fairly direct parallel between the fortunes of Eidos and those of its best-known cover girl.

Through the late nineties, Lara Croft's face was everywhere - not just in videogame publications, but in advertising campaigns for other products, in mainstream magazines and on the front pages of business sections which marvelled endlessly at the Eidos stock market rocket.

By the early years of this decade, the Tomb Raider franchise had moved to the silver screen, with Oscar-winner Angelina Jolie portraying Lara in the first of two movies. Say what you like about the quality of the flick, but Lara Croft: Tomb Raider showed the quality of the franchise. It pulled down over USD 300 million worldwide, making it into the most successful videogame adaptation ever, and easily grabbed the record for the biggest US opening weekend for a movie with a female protagonist.

Then, suddenly, it all went wrong for Tomb Raider - and simultaneously, the House That Lara Built began to crumble. The long-delayed Tomb Raider: Angel of Darkness, the series' debut on the PS2, was almost universally panned; despite its hugely extended development schedule, the game had clearly been released in an unfinished state. Only weeks later, the second Tomb Raider movie, Cradle of Life, sank at the box office - leading to the planned trilogy of films being abruptly cut short.

Tomb Raider went into a tailspin from which it has never quite recovered - even despite the efforts of US studio Crystal Dynamics, whose 2006 revival of the franchise and subsequent sequels have been generally well received. Worse, though, was the impact on Eidos itself.

Throughout the nineties, Tomb Raider had seemed like a talisman which protected the firm from even its worst excesses. From late 1996 to mid-2001, Eidos had funded Ion Storm, a hideously mismanaged and famously ego-driven development studio in Dallas whose incredibly late, grossly over-budget titles - including the legendary (for all the wrong reasons) Daikatana - sucked millions out of the publisher. It was one of the closest analogues the games market had for the wild excesses of the dot.com bust - and yet, shielded by the vast positive publicity generated by Lara Croft, Eidos seemed to sail through what should have been a humiliating episode for the firm.

By the time the Tomb Raider franchise stumbled in 2003, however, Eidos' teflon coating was badly tarnished. The following year brought a further sucker punch, as long-time Championship Manager developer Sports Interactive parted company with the publisher - taking with them the source code to the game, but leaving Eidos with the brand name. Despite Eidos' seeming faith that it was the brand, not the game, that was important, Sports Interactive's departure proved disastrous for Championship Manager. The developer easily brought most of the fanbase with it to its new franchise, the SEGA-published Football Manager, leaving Eidos facing the downfall of a second cornerstone brand in the space of only two years.

A publisher is only as good as its stable of titles and IP - and that IP is only as good as the publisher's ability to manage it. Eidos' problems stemmed from many factors, but it's tough to argue that fundamental mismanagement of IP wasn't a root cause. In the case of Tomb Raider, development was badly managed; in the case of Championship Manager, a developer relationship was clearly mismanaged. Sports Interactive has never publicly spoken of problems in its relationship with Eidos, but the reality is that developers don't jump ship, leaving behind brands they've been building for a decade, just for a change of scenery.

By mid-2004, portfolio problems had turned into financial problems. Rumours of potential suitors in an acquisition deal began to fly as the firm's cash reserves dwindled and its losses mounted. Over the coming year, several names would pop up as possible buyers - both within the industry (EA, in particular, was repeatedly connected to the company) and outside (Time Warner, Viacom and News Corporation were all said to be in talks at one point or another). It wasn't until March 2005, however, that a genuine suitor was revealed - investment group Elevation Partners, headed by former EA COO John Riccitiello, which made a firm offer for the company.

This is where the standard tale of a corporate rise and fall turns into a bizarre soap opera. A day after Elevation's offer went public, another offer appeared - this time from SCi Entertainment, a much smaller British publisher which had enjoyed a measure of success thanks to the controversial Carmageddon series and, more recently, the Conflict: Desert Storm titles from now-defunct studio Pivotal Games. SCi offered marginally more for Eidos, planning to fund the takeover with a stock offer. Elevation Partners dismissed the SCi bid out of hand, and everyone - including Eidos' directors - expected the shareholders to do likewise.

They didn't. Opinions and stories differ as to why not. Some would tell you that shareholders were simply more confident in the ability of SCi's management to trim the fat from Eidos and return it to profit. Perhaps more likely, however, is the view the some shareholders, having seen the value of their stakes in the company collapse, simply didn't want to see Eidos' failed management get rich from the Elevation buy-out, preferring the vastly more frugal settlements they would get from SCi. Either way, a month later, Elevation dropped out of the bidding.

SCi finalised their takeover in May 2005, with senior managers joyfully describing it as the deal of the century, and business journalists struggling to fit as many metaphors involving minnows swallowing sharks into their stories as possible. Most of the former Eidos management was promptly defenestrated, with the newly-installed SCi bosses making it clear that they were aiming to craft a leaner, tighter publisher - focusing on ensuring that the imminent relaunch of core franchises would be as high-quality as possible.

Some things worked. The reappearance of Tomb Raider, as noted, was generally considered a success, achieving in both the critical and commercial fields, although not exactly setting the world on fire all the same. Other things, however, didn't. Eidos' ability to generate strong new franchise IP had seemingly stagnated, and nothing SCi did kickstarted it. Worse, the product slippages which had dogged the publisher were getting worse, not better.

By late 2007, Eidos was talking openly about buyouts again. This time, the suitor seemed relatively obvious - media giant Time Warner, through its Warner Bros subsidiary, had picked up 10 per cent of the company in late 2006, and would subsequently increase its stake on a number of occasions. Other companies were said to be hovering - including EA, whose new CEO, John Riccitiello, had led Elevation Partners' rebuffed attempt to buy Eidos in 2005. EA's interest was thought to have been sparked largely by a desire to prevent Eidos from being sold to a major outside player such as Warner or Disney - the company having previously taken a large shareholding in rival Ubisoft for similar reasons.

All the talk of mergers took a blow, however, in early 2008 - when the firm announced that talks had been halted. Furious shareholders, sick of seeing delays to key titles and annoyed that the hoped-for acquisition had failed to materialise, demanded the resignation of top executives. Within a week, the former SCi bosses who had taken over Eidos - including CEO Jane Cavanagh, publishing boss Bill Ennis and development boss Rob Murphy - were gone.

CFO Phil Rogers, having joined only in March 2007, took over as chief executive, initiating restructuring plans which contributed to a gigantic GBP 100 million loss for FY2008. Rumours of acquisition deals being discussed, however, didn't dissipate with the departure of the SCi executives - and were only slowed slightly by the advent of the credit crunch, with all of its implications for corporate mergers and acquisitions.

Indeed, many observers viewed Phil Rogers' job as being straightforward - he needed to take whatever measures were necessary to sell the company. As such, it was hardly a surprise when a buyout was announced in February of this year, with shareholders enthusiastically endorsing the long-awaited deal. It was, however, a huge surprise when the bidder was revealed to be Square Enix.

Square's Story

The tale which leads Square Enix to this conclusion is an altogether less fraught one. Created in 2003 by a merger between Japanese giants Square and Enix, the former rivals whose RPG franchises have dominated Japan's games market for almost two decades, Square Enix has been aggressively pursuing growth ever since.

Some of that pursuit of growth has been rather unconventional, such as the firm's decision to exploit its original IP by entering the movie, TV and book publishing markets. Its willingness to branch into other media has not helped to exploit valuable IP such as Final Fantasy and Dragon Quest, it has also given Square Enix new hits - such as Fullmetal Alchemist, a manga (comic book) series published by Enix' book publishing arm and since converted into globally successful TV series, movie and game releases.

However, Square Enix' growth has also come about in more conventional ways. Facing concerns that the Japanese market is shrinking, the firm's strategy has, understandably, been to maintain revenue growth regardless - the best way to retain the same amount of shrinking pie being, of course, to increase the size of your slice. Thus in 2005, the company acquired legendary arcade game publisher Taito, and with it, the rights to classic franchises such as Space Invaders.

Last year, however, a similar deal - attempting to take over publisher Tecmo, creators of the Dead or Alive, Ninja Gaiden and Fatal Frame franchises - was rebuffed, leaving Square Enix looking elsewhere for further expansion. Overseas was a logical place to look, but Square Enix has never seemed comfortable investing heavily on foreign soil, despite the growing popularity of franchises such as Final Fantasy around the world.

This, perhaps, is why the Eidos deal was such a surprise - because Square Enix simply hadn't telegraphed any intention for major overseas expansion before it announced the acquisition bid. Yet on paper, it's hard to deny that the deal makes perfect sense for the Japanese giant.

Europe, after all, is a major growth market - and Eidos' London base provides a perfect jumping-off point for Square Enix to build its global presence, perhaps emulating the success SEGA has had with its European operation in recent years (a significant part of which, ironically, comes from publishing Sports Interactive's Football Manager following Eidos' parting of ways with the studio). Eidos' price tag is lower than Tecmo's would have been, with the Tecmo deal valued at over GBP 140 million, while Eidos is being sold for close to GBP 85 million - but the cost of bringing the company back up to speed will undoubtedly eat much of any remaining cash Square had allocated from its warchest.

The Square Enix deal is in some regards opportunistic, and I don't doubt that the extremely low value of Sterling against the Yen on the currency markets has helped to push the negotiations along. However, it also fits with Square Enix' unspoken but clear policy of expansion, and marks a bold move abroad for a company which will be hard-pressed to realise significant revenue growth in the home market in the coming years.

As for Eidos, British industry watchers who have fond (albeit typically cynical) views of the country's one-time publishing superstar will be keen to see what the Japanese company does with its new division. Relationships between Japanese and British firms, even as divisions of the same company, have not always been easy - with vastly different markets to address and major barriers in corporate culture to surmount. However, Square Enix is, in many ways, what Eidos must become to succeed - a powerhouse of IP whose attention to the perceived quality of its brands co-exists with a ruthless exploitation of the full potential of those brands. This, all along, has been one of Eidos' biggest failings - so perhaps, with a little tutelage from their new owners, we might finally see the House that Lara Built restored to its former glory.

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