E LECTRONIC A RTS, I NC. P OTENTIAL M ERGERS & A CQUISITIONS M&A committee: Kaitlyn Emerick, Jasmine...
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Transcript of E LECTRONIC A RTS, I NC. P OTENTIAL M ERGERS & A CQUISITIONS M&A committee: Kaitlyn Emerick, Jasmine...
ELECTRONIC ARTS, INC. POTENTIAL MERGERS &
ACQUISITIONSM&A committee: Kaitlyn Emerick, Jasmine Fortune, Claire Lin,
Patti Mansbach, Helen Tse
EA Potential Targets
Akamai Jasmine Fortune
Ubisoft Patti Mansbach
Take Two Helen Tse
Zynga Claire Lin
Electronic Arts-Acquirer
Kaitlyn Emerick
EA Transition to Online and Mobile Games
● Traditional gaming company: Microsoft’s Xbox, Sony’s PlayStation, and Nintendo Wii
● Popular games: Madden NFL Series, Battlefield, Titanfall and The Sims
● Acquired PopCap games in 2011 for $750M○ Big break into mobile and online gaming○ Market cap before: $8 billion○ Current market cap: $9 billion
EA Cost of Capital
Weighted Average Cost of Capital 15%
Cost of New Long-Term Debt 5%
Weight of Long-Term Debt10%
Shareholders’ Required Rate of Return 18%
EA Increasing Free Cash Flow
2014 2015 2016 2017 2018
$506M $308M $334M $386M $453M
Terminal Value $13B
$13.5B
Critical Assumptions
2013 2014-2018
Sales Growth -8% 18%
Costs of Goods as % of Sales 37% 33%
R&D as a % of Sales 30% 31%
EA is Fairly Valued
Estimated Value per share $28
Current Market Price as of 4/24/2014 $28
Current Market Capitalization $9B
● EA stock will not be used to acquire companies
EA Acquisition Budget
EA Budget
Cash $1B
Free Cash Flow $228M
New Debt $700M
Total Budget $2B
Debt Capacity
Current debt: $633M in convertible bonds due in 2016 with conversion price of $31.74
EA Potential Mergers & Acquisitions
Akamai Jasmine Fortune
Ubisoft Patti Mansbach
Take Two Helen Tse
Zynga Claire Lin
Akamai Technologies, Inc.
● Leading Provider in cloud services○ Superior delivery○ Optimization○ Security content online
● Serves a wide range of customers
Akamai Alta 2.0 May Create $4.4 M
● Alta 2.0: an updated version of web accelerator solution
● Initial cost: $1.2M ○ Net present value: $4.4M○ Payback period: < 1 year
Critical Assumptions Forecasted 2014
Number of solutions sold 1,300
Sales growth 5%
Price per solution $600,000
Akamai’s Cost of Capital
Weighted Average Cost of Capital 20%
Cost of New Long-Term Debt 4%
Weight of Long-Term Debt10%
Shareholders’ Required Rate of Return 24%
Akamai Increasing Free Cash Flow
2014 2015 2016 2017 2018
$665 M $913 M $1.6 B $2.1 B $2.9 B
Terminal Value $12.6B
$15.5 B
Critical Assumptions
2013 2014-2018
Sales Growth 15% 22%
Property as % of sales 29% 31%
Akamai Stock is fairly valued
Estimated Value per share $53
Current Market Price as of 4/24/2014 $53
Current Market Capitalization $9.6B
Shares Outstanding 179M
Premium 20% $63
Purchase Price $11.3B
Akamai will not be acquired
● EA cannot afford Akamai at this time● Akamai’s estimated share price is too high
Ubisoft is in the European Market
● Based in Paris, France. ● 129 offices worldwide.
● Largest is in Montreal, Canada.
● Acquiring Ubisoft could increase cash flows in the European market for EA.
Ubisoft Will Be a Successful Cross-Border Acquisition
● Only 17% of cross-border mergers and acquisitions create shareholder value.
● EA will create incentives for the key people at Ubisoft to stay.
Ubisoft Voice Over IP May Create €8 M
● Implement a voice over IP system for international phone calls.○ Initial cost: €1.5M○ Net present value: €8M○ Payback period: <1 year
Critical Assumptions Forecasted 2014
Euro Per Dollar Rate €0.75/$
Hours Spend on the Phone Per Employee Per Year
130
Telecom Company Cost Per Minute
€0.09
Ubisoft Cost of Capital
Weighted Average Cost of Capital 19%
Cost of New Long-Term Debt 5%
Weight of Long-Term Debt15%
Shareholders’ Required Rate of Return 20%
Ubisoft Increasing Free Cash Flow
2014 2015 2016 2017 2018
€484M €627M €800M €1B €1.2B
Terminal Value €6.7B
€8B
Critical Assumptions
2013 2014-2018
Sales Growth 18% 25%
Costs of Goods as % of Sales 27% 27%
R&D as a % of Sales 35% 37%
Ubisoft is Undervalued
Estimated Value per share €18
Current Market Price as of 4/24/2014 €13
Current Market Capitalization €1.35B ($1.8B)
Shares Outstanding 96M
Premium 20% €15
Purchase Price €1.5B ($2B)
Ubisoft could be bought at a later time
● Ubisoft is not in the online and mobile industry.
● Just because we can afford to acquire them, does not mean we should.
● Should invest in online and mobile before we expand internationally.
Take Two Interactive Software Inc
● Leading developer, marketer, publisher of video game products○ Grand Theft Auto (GTA)○ BioShock Infinite○ NBA 2k14
Take Two GTA VI May Create $871 M
● Create Grand Theft Auto VI○ Initial cost: $8.2M○ Net present value: $871M○ Payback period: < 1 year
Critical Assumptions Forecasted 2016
Units Sold 40M
Quality & Assessment $1.3M
Marketing/Promotions $535,000
Take Two Cost of Capital
Weighted Average Cost of Capital 16%
Cost of New Long-Term Debt 5%
Weight of Long-Term Debt10%
Shareholders’ Required Rate of Return 17%
Take Two Optimistic Free Cash Flow
2014 2015 2016 2017 2018
$177M $42M $150M $192M $422M
Terminal Value $2.6B
$3B
Critical Assumptions
2013 2014-2018
Sales Growth 49% 50%
Costs of Goods as % of Sales 59% 55%
R&D as a % of Sales 6% 8%
Take Two is Fairly Valued
Estimated Value per share $20
Current Market Price as of 4/24/2014 $22
Current Market Capitalization $1.7B
Shares Outstanding 86M
Premium 20% $24
Purchase Price $2.1B
Take Two will not be acquired
● Uncertainty to Take Two’s very optimistic free cash flows
● EA cannot afford Take Two at this time● EA focusing on online and mobile sector
Zynga, Inc.
● Develops,operates, and distributes online social games.○ Farmville○ Chefville
● Possible acquisition because it is in the online and mobile market.
Zynga New Social Game App Will Create $18 M
● Launch new social game app○ Initial cost: $5.5M○ Net present value: $18 M○ Payback period: < 1 year
Critical Assumptions Forecasted 2015
New active users 11M
% of users that make in-app purchase
35%
Zynga Cost of Capital
Weighted Average Cost of Capital 17%
Cost of New Long-Term Debt 5%
Weight of Long-Term Debt20%
Shareholders’ Required Rate of Return 20%
Zynga Positive Free Cash Flows
2014 2015 2016 2017 2018
$82M $45M $121M $243M $405M
Terminal Value $4B
$4.4B
Critical Assumptions
2013 2014-2018
Sales Growth 12% 25%
Expenses as % of Sales 28% 21%
R&D as a % of Sales 47% 42%
Zynga is Overvalued
Estimated Value per share $2.28
Current Market Price as of 4/24/2014 $4.35
Current Market Capitalization $3.7B
Shares Outstanding 832M
Premium 20% $5.22
Purchase Price $4B
Zynga Could Merge With EA
Why?● EA does not have enough money to
acquire Zynga● Zynga is overvalued
Benefits:● Increase market cap and company value● Align to EA’s business model● Only implementation cost
No Acquisitions Will Be Made at This Time
Company Recommendation
Akamai Will not acquire because it is too expensive.
Ubisoft Future potential target for international business.
Take TwoWill not acquire. Firm not in mobile industry or international.
ZyngaWill not acquire because it is too expensive. Possible merger in the future.
Moving Forward
● Our recommendation is to acquire small privately held companies because they are more affordable and will be easier to integrate into Electronic Arts.
Merger Success
IT can be a powerful factor behind M&A success
2 key points that ensure back-end integration
● Have its own IT in the best shape before initiating any deals
● As companies begin merger talks, IT leaders should be involved as well
Principled Leadership
● Communicate regularly○ Integrated culture○ Create positive business momentum and
discipline
● Get staff involved○ Create trust and purpose in the community○ Allows employees to remain focused and
engaged on the job
No Acquisitions Will Be Made at This Time
Company Recommendation
Akamai Will not acquire because it is too expensive.
Ubisoft Future potential target for international business.
Take TwoWill not acquire. Firm not in mobile industry or international.
ZyngaWill not acquire because it is too expensive. Possible merger in the future.