So the deal whereby EA buys out VG Holdings, the parent company of Bioware and Pandemic, for $860m, has been widely reported. Let's analyze it a little bit.

VG Holdings was founded in 2005, when Elevation Partners, a private equity firm, invested $300m in the new entity, which merged developers BioWare and Pandemic, both highly regarded independent game developers--among the few high-profile studios left, in fact.

At the time, I mused that the attraction to Bioware and Pandemic might be that they needed capital to self-fund more costly "next gen" console games (though I've been told since that it was for "other business reasons"). Private equity firms, however, generally invest with the expectation of VC-like returns--that is, the hope, or at least prayer, of a cash-out within 5 years and a return of something like 10-fold.

It wasn't clear how Elevation Partners expected to see that kind of return; by self-funding, Bioware/Pandemic can, of course, receive a higher proportion of the consumer dollar (quite possibly, double) than they could if reliant on publisher funding--but they'd need quite a string best-sellers to generate returns at that level. At the time, I thought perhaps Elevation was grooming them for an IPO, which might also make sense, but either I was wrong, or they've given up on that thought.

Of the $860m, $620m goes to stockholders (the remainder as equity to employees, or in terms of stock options or working capital). So the best case for Elevation is that they've doubled their investment--but remember that the $300m bought them a "majority" of the combined companies, not full ownership. What that "majority" constituted was never reported, but let's say for the sake of argument that it was 60%, and wasn't diluted below that level by stock options to management in the interim. 60% of $620m is $372m, or a bit under 25% more than they invested. That's not an impressive return, and my guess is that's a lot closer to the mark than 100%, as implied by the CNet article linked above.

On the other hand, it's an exit; if, as I suspect, Elevation came to the conclusion that the investment wasn't really going anywhere, they got out whole, with a return better than if they'd parked the money in T-bills, and while that's not a win, it's not a bad recovery.

Of course, there are also tangled interests here. John Riccitiello, now CEO of EA, led the Elevation investment when at Elevation Partners. I suspect that some of EA's stockholders will have some questions about the transaction, as a result; it's the largest single purchase EA has ever made, and while there are reportedly ten games in the pipeline (and some nice IP), $80m+ per title is a pretty pricey way to obtain games for your publishing program. Not to mention EA's history of failure in terms of integrating and succeeding with acquired third-party developers.

All very interesting, to be sure.
posted by Greg at 2:21 PM