EA’s $55 Billion Deal Spurs a Shake-Up in the Gaming Sector

Key Points

• Video game maker Electronic Arts is on track to be taken private in a $55-billion deal, the news of which sent shares upward to all-time highs.
• While there is minimal potential for new investors in EA to win gains at this point, alternatives may be compelling as the gaming industry changes.
• Take-Two Interactive and Roblox are two firms that could be poised for success as an industry-wide shift takes place.

Major video game publishing firm Electronic Arts Inc. NASDAQ: EA, known for franchises including FIFA and Battlefield, drew headlines in late September when it announced it would be acquired in an all-cash deal worth a whopping $55 billion. The investor consortium acquiring the company, which includes Silver Lake, Affinity Partners, and the Saudi government's sovereign wealth fund, plans to take EA private. Meanwhile, investors face key questions: how should they respond to the recent news from EA before the acquisition is finalized? What does this development suggest for the wider video game industry, a giant that, despite recent slower growth and tempered consumer spending, still has a global valuation of nearly $500 billion?

In the short term, continuing to hold shares of EA may be the optimal move for most prior investors, as the company's stock spiked following the acquisition announcement. Shares are trading up 19% in the last month but have plateaued so far in October. For investors, the greater opportunity may actually lie in alternatives like Take-Two Interactive Software Inc. NASDAQ: TTWO and Roblox Corp. NYSE: RBLX, although some caution is warranted as the video game industry shifts.

What Might Happen to EA Shares While Awaiting Acquisition?

The EA deal announcement was a boon for investors already holding stock in the company, with the value of the deal placing a sizable premium of about 17% on the share price even at its highest point earlier this summer. Of course, the potential for new investors in EA to win gains in the acquisition is mostly nil at this point, as the price of EA stock quickly shot up above $200 to new all-time highs after the news broke.

Buying shares of EA now—unless there's an unusual blip in the price and it drops before the acquisition is finalized—is not likely to generate much by way of returns for investors. There has, on the other hand, emerged a contingent of investors willing to bet against EA stock and, potentially, the acquisition itself. These investors have contributed to a growing short position in recent weeks: short interest has climbed by almost 13% in the last month. This is a risky bet as well, as it seems highly likely the deal will close despite a 45-day window for other offers to emerge.

Implications for the Broader Gaming Industry

EA's reliance on in-game microtransactions and other controversial game mechanics has drawn ire from customers in the past and even prompted a European investigation into whether some of the features of EA games might constitute gambling. These same customers may see the company's transition to a privately-held firm as a potential turning point away from some of those practices—or as an opportunity to expand upon them.

In either case, the acquisition is likely to have significant broader implications for the gaming industry. If customers view EA as taking more creative liberties and presenting a more favorable set of mechanics in its games, this could spell trouble for rivals in the industry. Perhaps more likely, though, is the reality that EA will take on about $20 billion of debt in the acquisition process, and that this may drive it to double down on its revenue-generating approaches.

If investors take a bearish view of EA's capacity to continue to win fans as it goes private, it may be worthwhile to look at competitors like Take-Two or Roblox. Take-Two enjoyed a strong earnings beat over the summer and impressive net bookings of more than $1.4 billion, and it is expected to launch the highly anticipated next game in the immensely popular Grand Theft Auto series in the coming quarters. Roblox noted impressive revenue growth of 21% year-over-year for the latest quarter as bookings, daily active users, and engaged hours all climbed. Both TTWO and RBLX shares have broad support from a majority of analysts who have rated them a Buy, making them worthwhile considerations for investors attempting to play the ongoing shift in the gaming industry as the EA deal continues to take shape.