At $55 billion, it is the largest deal of its kind in history, eclipsing the purchase of TXU in 2007 for $45 billion.[2] But while the headlines focus on the size of the transaction, the real significance for investors lies deeper in the details. This is what we plan to investigate in this article.
Why EA? Why Now?
The buying consortium has, on the face of it, taken a considerable gamble. The price per share - $210 - represents a 25% premium over the stock’s value before the deal was rumored to be taking place.[3] The debt component of the deal is also significant at 20 billion dollars.[4]
To understand the rationale, we need to understand the challenges that EA currently faces.
Sales have been relatively stagnant for some years, reflecting a broader post-COVID normalization in the gaming market.[5] Over the past five-year period, it has grown at roughly one-quarter of the pace of the market as a whole. Earlier this year, problems with its Global Football business caused its share price to slide by 16.7% in one day.[6]
These circumstances make a private deal (with the right investors) a logical and highly attractive choice. Why is this?
The Private Perspective
While Wall Street may see a troubled under-performer, suffering from a post-COVID correction in demand, the acquiring consortium, led by veteran PE firm Silver Lake, sees opportunity and upside.
This view holds that a short-term oriented, public market is punishing EA for past errors, while underpricing the future potential of the firm should these problems be fixed.
Fixing these problems does not just refer to a burst of cost-cutting, but ambitious multi-year strategic initiatives, such as maximizing the value of the existing EA portfolio (which includes EA Sports FC, Madden NFL, and Apex Legends) and a global gamer base of approximately 700 million.[7]
A private ownership structure provides the ideal launchpad for such a turnaround, for the following reasons:
Long-term outlook: Genuinely restructuring a firm will take years, potentially a decade, whereas public markets struggle to look beyond the next earnings call. A private team can allocate the appropriate amount of time to plan and execute fundamental change.
Freedom from the spotlight: Public firms operate by law amid a much higher level of scrutiny than private firms. This makes it harder to execute ambitious initiatives without the competition becoming aware, or management being deterred by external pressures to deliver faster results.
Unity of incentives: Large public firms typically have fragmented shareholder bases with conflicting timelines, incentives, and opinions. Smaller, private teams can both devise and rally around a coherent strategy.
From an investor’s perspective, the above are naturally advantages as well. On a personal level, the long-term nature of the investment itself shields them from the short-termism and psychological buffeting of a constantly fluctuating market.
Crucially, it also provides a clear focus. With a continuous, identifiable investment team in charge of the process, it is possible to ‘bet the jockey, not just the horse’. Silver Lake, for instance, has a verifiable track record in turning around technology companies (Dell[8], Skype[9], Avago[10]) prior to a sale or new IPO.
The Takeaway
The outlook for the global economy, and by implication, the capital markets, is an uncertain one.
There is a non-zero probability that future growth may not match the past two decades of double-digit returns. In such an environment, following the market may lead to disappointing results, or even missing important financial goals.
Targeting ‘alpha’ is a potential solution, but notoriously difficult to achieve in public markets, whether bullish or bearish, owing to the amount of public information and scrutiny. Carefully chosen deals, run by vetted, experienced teams, provide a realistic path to outperformance.
The only remaining issue is gaining access to such investment teams in the first place. This is where we support our clients, having worked with experienced dealmakers like Silver Lake for years, providing individual investors with institutional-grade opportunities.
‘Good times’ and ‘bad times’ are purely a matter of perspective. With the right attitude (and experience), opportunities are always abundant, in any market.
