Game maker Eidos' shares slipped today on news that it rebuffed a potential buyout offer. But with 2001 seen as a banner year for game sales, the company was probably right not to jump into a deal with its shares deeply depressed. The news underscores a broader industry dynamic that suggests trying to buy a company like Eidos might not be the best move unless you find it in the bargain bin.
 |
|
|||||||
|
||||||||
|
||||||||
By
But is the hit warranted? Investors might do better to stand behind the company's directors today. Though it's difficult to say for sure without seeing the terms of the proposed deal, a quick look at Eidos' 12-month chart shows a sector badly depressed as sales have slumped in advance of the launch of three new game consoles: Sony's (NYSE: SNE) PlayStation 2, Nintendo's GameCube, and Microsoft's (Nasdaq: MSFT) X-Box.
Some of Eidos' competitors -- most notably market leader Electronic Arts (Nasdaq: ERTS), which I own, and recent StockTalk subject Activision (Nasdaq: ATVI), second among publicly traded pure-plays in terms of revenue -- have begun recovering in advance of PlayStation 2's U.S. debut later this month. (It's already a monster hit in Japan.)
But share prices have been slower to recover at some of the smaller players -- such as Eidos. So why haven't we heard more takeover talk? I can think of a few reasons.
For one, few directors worth their compensation (in any industry) will approve a sale when a strong sales cycle lies ahead and the stock is beaten down.
More importantly, though, you've got to take a look at some of the underlying dynamics of the industry to explain why there have only been a small handful of ownership changes in the focus group Paul Larson examined for our Industry Snapshot feature two years ago: Mattel (NYSE: MAT) bought The Learning Co., Vivendi's (NYSE: V) Havas bought Cendant's (NYSE: CD) software operation, and Infogrames (Nasdaq: GTIS) took over GT Interactive and stole its ticker symbol.
When game software companies drag out their shopping carts -- or go looking for partners with the smaller, privately owned development studios that often handle only a few games at a time -- they generally have something in mind: a specific game, franchise, or game "engine" (a framework for making games that can be reused again and again for different titles). A good example of this is Microsoft's June purchase of Bungie: The onetime Chicago company's engine for the upcoming Halo shooting game was prized by Bill Gates' minions.
Buying another publisher -- and paying a market premium, quite likely getting a number of properties you don't want that could compete with or cannibalize ones you already own -- just doesn't always make good fiscal sense. While this sector carries some of the financial dynamics of the software industry, it's in many ways more like a movie or music studio. There are only so many marketing dollars to go around -- hence the growing focus on developing, acquiring, and maintaining as many "franchise" titles and brands as possible.
That latter phenomenon is exacerbated by the upcoming launches of the new console systems, for although some old friends will never die -- Nintendo's Mario will almost certainly be around forever -- console and game makers will nevertheless look to create "fresh faces" that build off the immense power of the upcoming systems.
It's not an environment that would seemingly require large-scale acquisition to forge success. The focus will continue to be on creativity, marketing, and the ability to maximize the computing muscle of the consoles themselves.
That doesn't preclude a few things from happening. First, ambitious buyers might try to pick a competitor up on the cheap (which may have been the story in the case of Eidos today) and, secondly, that the entry of Microsoft into the picture upsets the entire apple cart for good. The Redmond Rule Maker's war chest could probably swallow up the entire sector with one gulp.
Your Turn:
Surprised there wasn't more consolidation -- or at least more talk -- in the sector this summer? Share your thoughts on our Eidos discussion board.
RSS Headlines
Fool UK
