On Feb. 8, Electronic Arts (EA 3.30%) announced it was acquiring Glu Mobile (GLUU) at a market cap of $2.4 billion, or $2.1 billion when excluding the cash on Glu Mobile's balance sheet. Glu Mobile, as its name implies, is a mobile games-focused studio behind hits like MLB Tap Sports Baseball and Design Home.
Was it smart for EA to acquire these mobile gaming assets? Let's take a look.
How the acquisition deal works
The acquisition for Glu Mobile's assets is an all-cash deal, financed entirely by the $6.7 billion in cash on EA's balance sheet. EA will pay Glu Mobile shareholders $12.50 in cash for every share they own, assuming the deal goes through, a 30%+ premium to where Glu shares were trading earlier in February.
While Glu isn't very profitable, it has grown bookings (the video game equivalent to revenue) each of the last four years, bringing in $544 million in the last 12 months ending Sept. 30, 2020. At a $2.1 billion valuation, it looks like EA is acquiring Glu's business at a bookings multiple of 3.9. This is a discount to EA, which trades at a bookings multiple over six.
Due to the hit-or-miss tendency of mobile titles, gaming studios with a mobile focus like Glu Mobile typically get a discount to console/PC-focused studios like EA. With that in consideration, a buyout multiple of 3.9 times bookings feels reasonable, but it's not a steal for EA shareholders.
What could go right with the acquisition
In EA's investor presentation, management touts Glu Mobile's 500 mobile-first developers, the combined 15-plus live services, and the ability to supercharge Glu's existing franchises as strategic reasons for acquiring the company. With EA's global licensing expertise for sports content, EA can bring MLB Tap Baseball to new geographies, while also expanding Glu's entire business to have a more global presence (the majority of its current sales are in North America). On the flip side, EA can leverage the development template of Tap Baseball to help it build premium mobile titles for other sports franchises, specifically FIFA and Madden NFL.
As well, Glu Mobile currently has 65%-plus gross margins, but historically has only had net profit margins in the 10% to 20% range. Gross margins aren't as high as EA at 75%, but with cost-savings on advertising and administrative expenses, I think it is reasonable to expect Glu's profit margins to expand under the EA umbrella.
The combined mobile studios brought in around $1.32 billion in bookings over the past 12 months. If EA and Glu Mobile can execute the integration and do what they claim in the acquisition presentation, investors should expect $2 billion or more in annual bookings from EA's mobile segment within the next five years.
What could go wrong
Whenever looking at an acquisition, or a business in general, it is essential to evaluate not only what could go right, but what could go wrong. For EA investors, that means evaluating any scenarios where EA doesn't ever recoup the $2.1 billion acquisition cost of Glu Mobile. As stated above, mobile is a hit-and-miss business, with very few titles having relevance for a decade or longer. With Glu Mobile specifically, while it is diversified across different genres like sports, fashion, and design, only one of its meaningful franchises (Diner Dash) was released before 2014. While not a huge turnover, this indicates that mobile studios like Glu have to continually come up with new ways to please customers, unlike EA which can roll out updates to the same FIFA and Madden NFL titles with consistent success.
That being said, while mobile isn't EA's bread and butter, doubling its presence in the fastest-growing segment of the gaming industry was a smart move. Investors should be excited to see what kind of content the combined studios of Glu and EA can come up with over the next decade.