EA acquires game developers

Deal for BioWare, Pandemic worth $860 million

Marking its largest acquisition ever, Electronic Arts on Thursday struck a deal worth $860 million to buy indie developers BioWare and Pandemic Studios.

It’s the first major purchase made by new EA chief exec John Riccitiello and one that may raise a few eyebrows, as the two developers are owned by private equity firm Elevation Partners. Prior to rejoining EA in February, Riccitiello was a partner in Elevation and led its deal to combine the indies BioWare and Pandemic in 2005.

Acquisition appears to be a windfall for Elevation. The deal to merge the two developers was valued at a little more than $300 million.

Riccitiello admitted in a conference call that his residual interest in Elevation would give him a financial benefit down the road but noted that EA’s board established an independent committee to evaluate and negotiate the deal.

Deal nonetheless makes clear that EA is investing aggressively in its future despite a series of perceived missteps, such as missing out on the launch of the Wii, that have soured some investors. It also demonstrates that, despite the infusion of private equity money into the vidgame world in recent years, the endgame for most successful developers is to be purchased by one of the major publishers, which like to secure talent inhouse.

Landing BioWare and Pandemic, two of the most successful indie developers on the market, is a coup for EA, albeit a very expensive one. Their business model, under which Elevation funded their investment in a number of original franchises that they owned, made them among the very few developers that could steer their own course.

Edmonton, Alberta-based BioWare, which specializes in role-playing games, made the award- winning “Star Wars” game “Knights of the Old Republic” for LucasArts and will be releasing a new sci-fi game, “Mass Effect,” through Microsoft next month. Its Austin, Texas, studio is also at work on an untitled but highly anticipated massively multiplayer online game.

Los Angeles-based Pandemic focuses on action-adventure games. It produced LucasArts’ bestselling “Star Wars Battlefront” and already had a deal to distribute its “Mercenaries 2” through EA.

“They have over 10 franchise titles coming out, six of which are wholly owned IP,” said EA Games prexy Frank Gibeau, who will oversee the two developers through his division of the publisher. “We want to own more stuff that we build. It’s a critical part of our business.”

Gibeau also noted that EA will benefit tremendously from the two developers’ specialties. While it has the industry-leading sports label, makes games based on a number of Hollywood’s top licenses like “The Lord of the Rings” and “Harry Potter” and generates huge amounts of money from its “Sims” label, EA doesn’t have many original action or RPG titles.

“With these guys as part of EA, we will become very competitive in those areas quickly,” he told Daily Variety.

If BioWare’s in-the-works MMO is a hit, that could also finally make EA a big player in a category dominated by Blizzard’s “World of Warcraft.”

It’s not clear yet how many of BioWare’s and Pandemics’ in-development titles EA will be able to distribute itself and how many are already committed to other publishers.

Microsoft, for example, may retain the rights to publish any sequels to “Mass Effect.”

BioWare and Pandemic will continue to operate with their current leadership and are expected to focus on their own product pipeline rather than be assigned installments of their new owner’s existing franchises.

For its part, EA will be able to extend some of BioWare’s and Pandemic’s self-owned games into new areas, like mobile.

Publisher will pay $655 million in cash to VG Holding, the company set up by Elevation to control BioWare and Pandemic. In addition, it will issue up to $155 million in equity to employees depending on performance and is assuming $50 million worth of stock options.

EA said the deal will be modestly dilutive in the winter quarter, when it’s expected to close. It’s expected to break even in fiscal 2009, which starts in March, and be profitable starting in fiscal 2010. The two developers will bring in more than $300 million in revenue in each of the next two fiscal years.

Shares in EA were up a modest 2% in after-hours trading following the announcement.