Electronic Arts: The Private Markets Premium
On September 29th, Electronic Arts (EA), a leading player in the gaming industry, revealed that it would be taken private by a consortium of sovereign wealth and private equity funds, with the deal scheduled to close in 2027. [1]
This transaction, valued at $55 billion, stands as the largest deal of its kind in history, surpassing the $45 billion purchase of TXU in 2007.[2] While the size of the deal has captured attention, the real implications for investors lie deeper within the details. This article explores these critical aspects.
What Makes EA a Strategic Acquisition Right Now?
At first glance, the acquisition by the consortium may appear to be a bold gamble. The price per share of $210 represents a 25% premium over the stock's value prior to rumors of the deal.[3] The debt component of the deal is also notable, amounting to $20 billion.[4]
To fully comprehend the rationale behind this move, it is essential to understand the challenges currently facing EA.
For several years, EA’s sales have been relatively flat, reflecting a broader post-COVID normalization within the gaming market.[5] Over the last five years, the company has grown at roughly one-quarter of the pace of the overall market. Moreover, earlier this year, issues within its Global Football business led to a significant 16.7% drop in its stock price within a single day.[6]
These conditions make a private deal with the right investors an attractive and logical choice. But why is this the case?
The Private Perspective
While Wall Street may view EA as a troubled underperformer, grappling with a post-COVID demand correction, the acquiring consortium – led by the experienced private equity firm Silver Lake – sees substantial potential.
This viewpoint argues that the short-term focus of public markets is penalizing EA for past mistakes, while simultaneously undervaluing the company's future prospects, assuming these challenges are resolved.
Addressing these challenges involves more than just a round of cost-cutting; it requires ambitious, multi-year strategic initiatives. These initiatives include maximizing the value of EA’s existing portfolio (which includes EA Sports FC, Madden NFL, and Apex Legends) and tapping into a global gaming audience of approximately 700 million people.[7]
A private ownership structure provides the ideal foundation for such a transformation. Here’s why:
Long-term Outlook: Restructuring a company is a lengthy process, potentially spanning several years or even a decade. Public markets, however, often struggle to look beyond the next earnings call. A private ownership structure allows a team to dedicate sufficient time to plan and execute substantial, long-term changes.
Freedom from the Spotlight: Public companies operate under a much higher level of scrutiny by law compared to private companies. This intense oversight makes it more difficult to implement ambitious initiatives without competitors becoming aware, or management facing pressure to deliver quicker results.
Unity of Incentives: Large public companies typically have fragmented shareholder bases, each with differing timelines, incentives, and opinions. In contrast, smaller, private teams can unite around a single, coherent strategy.
From an investor’s perspective, these factors naturally offer significant advantages. On a personal level, the long-term nature of private equity investments helps shield investors from the psychological strain and volatility often associated with constantly fluctuating public markets.
Equally important, a private structure provides clear focus. With an experienced, dedicated investment team at the helm, investors can “bet on the jockey, not just the horse.” Silver Lake, for instance, has a proven track record of successfully turning around technology companies such as Dell,[8] Skype,[9] and Avago[10] prior to their sales or IPOs.
The Takeaway
The global economy and, by extension, capital markets, are facing an uncertain future. There is a non-zero probability that future growth will not mirror the double-digit returns seen over the past two decades. In such an environment, following the market’s movements could lead to disappointing results or even failure to meet key financial objectives.
Targeting “alpha” represents a potential solution, but it is notoriously challenging to achieve in public markets, whether markets are bullish or bearish, due to the large amount of public information and scrutiny. However, carefully selected investments, managed by skilled and experienced teams, offer a realistic path to superior returns.
The key issue, then, is gaining access to these investment opportunities. This is where we support investors. Having worked with experienced dealmakers like Silver Lake for years, we provide individual investors with institutional-grade opportunities that were once limited to large institutional investors.
Ultimately, the distinction between “good times” and “bad times” is often a matter of perspective. With the right mindset and experience, opportunities remain abundant, regardless of market conditions.
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