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EA's Ubisoft Saga

By Jeff Hwang
January 6, 2005

On Dec. 20, Electronic Arts (Nasdaq: ERTS) announced that it would buy a 19.9% stake in French video game publisher Ubisoft. Since then, Ubisoft's stock has risen almost 60% amid speculation that EA -- by far the largest independent video game publisher -- was moving to buy the whole company.

To make things more interesting, Ubisoft has declared the bid hostile and reportedly had also contacted French media giant Vivendi Universal (NYSE: V) about a possible merger to thwart any takeover attempt from EA.

EA bought the share block from Dutch investment firm Talpa Beheer for what is estimated to be between $85 million and $100 million. As a result, EA now controls 18.4% of Ubisoft's voting rights, while the five Guillemot brothers who founded Ubisoft own 17.5% of the firm and control 22.8% of the voting rights.

There's no question that EA would be interested in owning Ubisoft outright. Ubisoft's game portfolio includes hits such as Splinter Cell and Prince of Persia and would clearly augment EA's non-sports lineup. In addition, EA's marketing power would augment the value of those games. And with $2.5 billion in cash on the balance sheet, EA can afford it.

That said, EA's purchase was intended to give it options. EA's 19.9% ownership could potentially serve as a launch pad for a full takeover, while its 18.4% voting interest protects its competitive interests by making it more difficult for other prowling competitors --  such as Microsoft (Nasdaq: MSFT) or Take-Two Interactive (Nasdaq: TTWO) -- to pursue Ubisoft.

At this point, there's no reason for EA to pay an uber-premium for the rest of Ubisoft unless it believes that another serious buyer will emerge. Vivendi has been trying to dump its own money-losing video game unit. And this morning, both Vivendi and Ubisoft denied that talks concerning a "white knight" deal are currently taking place.

Instead, the Financial Times reported this afternoon that Ubisoft will defend itself from a hostile buyout by purchasing Gameloft, a subsidiary that would substantially increase the company's voting interests.

I think it's highly probable that EA will eventually take further action, but I'm not convinced that there's any pressure to do it now. It seems more likely that EA would approach Ubisoft about a potential deal on friendly terms once the stock has time to cool off. In the meantime, EA's investment is obviously doing fine.

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Fool contributor Jeff Hwang owns shares of Electronic Arts.