A few weeks ago Eidos ( I can't bring myself to call it SCi) issued a press release indicating it was in takeover discussions with unnamed suitors. Rumor reports pointed to Warner and NBC/Universal. I thought it was a good idea. Then, last week Eidos issued a release indicating the acquisition offer was turned down and the company would need another 55 million pounds to stay alive. Viewing this from the outside, you could either say, Warner and Robert Tchenguiz came in at a bargain price, or, nicely played Eidos.
A bit of history. . .
Tchenguiz is reported to be the man behind SCi's takeover of Eidos in the first place. In March 2005, Elevation Partners' all cash offer lost out to SCi's cash and stock bid, for the acquisition of Eidos. He purchased a 15 percent stake in the company at the time. The valuation was within spitting distance of the valuation in the deal announced last Friday. Warner, didn't arrive until 18 months later, when it purchased a 10.3 percent of the company. Their investment of USD 87.5 million plus some licenses, especially when adjusted for decline of the dollar relative to the pound, is very close to the total market capitalization of the company today.
Back to today . . .
I really don't know what happened in the discussions, but just for the fun of it, let's make some drama. Imagine prospective acquirers, sitting at the table with a "beleaguered" company thinking they have the upper hand. Rumors of two bidders circulate, and then all of a sudden one's parent company misses it's quarter and drops out. Since there is no one else at the table, and the company cannot survive without cash, Warner feels strong. A low ball equity heavy offer is made, the press release indicated the offer was turned down because the equity component was too high. They reason Eidos has to take it, it is their only option right? Wrong. Cuban missile crisis time.
Eidos knows Warner came in at significantly higher valuation. If Eidos survives, there is a chance of recouping. If Eidos tanks, the investment is gone. So, Eidos turns down the offer and says it will raise money through an equity sale. In Warner's eyes, if the equity sale goes well and someone else comes in, the company is saved, but their position is diluted. If the sale does not go well, the company tanks, and Warner is out USD 87.5 million. If they put the money in at a price discounted to the current trading price, they ensure the survival of the company and reduce the effective purchase price of their investment by half. Well, when you put it that way. . . . The only remaining piece is going back to the largest shareholder/about to be second largest shareholder and ask if he would like to remain number one. Why yes I would, I will increase my stake to 2% more than yours.
While this is likely not an accurate description, it is more exciting than saying the parties couldn't agree on a purchase price, so the parties immediately agreed upon an alternative which would benefit all involved. As a result of the investment, Warner's investment is protected, Tchenguiz protects his investment and remains the largest shareholder and Eidos stays alive. Overall, it looks like a rollback of the clock to December 2006. But wait. . .
It would be a rollback, if not for everything else. There are a bunch of squishy words and actions which indicate there may be more going on. Stuff which really makes Warner look like they deserve the "well played" accolade.
Eidos' CEO, Phil Rogers, announced the deal as a strategic partnership which gives Eidos increased scale in North America, and help Eidos achieve its goal of growing North American revenue to 50% of the company's revenue. As Charles Cornwall said 11 years ago when he had the same goal, the US is the largest homogenous market in the world, without it, a game company cannot survive. Europe is about the same size as the US, but it is fragmented by language, borders and distributors. In the US, all but a small percentage of the market is covered by a handful of accounts, and a single language. When Eidos achieved the goal about three years after Charles set out to do it, the market value of the company skyrocketed. The US market was grown by placing business development, production and marketing resources in the United States. Every game company since then learned this is the only way to do it. This is why all the Japanese companies are increasing their presence here. In the years following Charles' departure, the US business development, production and marketing where eliminated or significantly reduced. The reductions were met with a corresponding decline in the relative size of the market and a 90% decline in market value. The curious thing about Friday's announcement though, is the deal, as reported, indicates relative growth will occur, but it only addresses distribution. On its face, there is no change in the relationship. Warner was distributing Eidos in the States before the deal, and they are distributing after the deal. Perhaps the clues lie in the actions and not the words.
1UP reports Eidos laid off its entire PR, marketing and sales departments. If you pair this with Warner's operations build up over the past couple of years in the US and Europe, it looks like Warner may be having its cake and eating it too. Sun Tze taught us to seize control by controling supply lines - regardless of the foregoing, I still believe anyone who quotes Sun Tze is a dick. If Warner is takes over the vacated roles, Warner will control Eidos' revenue supply lines. Charles used say "the lowest form of life is a minority shareholder." They couldn't do anything and no one had to pay attention to them. But what about a minority shareholder who controls your supply lines? You have to listen. It is not just about getting Eidos to listen. Warner gains scale, which John Riccitiello has been saying is critical to success in the game business. You must be big to survive. If Warner is in fact taking over marketing and distribution, they are amortizing investments in their infrastructure across Eidos properties as well as their own, and increasing their power in the retail channel. All without paying the full purchase of the company and without having to worry about funding the further operating expenses. So who had check mate?
This sounds great, but it is probably not all there is to the deal. When we sold the Tomb Raider film rights, Warner was the most aggressive suitor and ever since Jason Hall, their interactive group expressed its desire for games which could migrate to film. If, in addition to enhanced distribution and marketing, Warner got film rights over Eidos IP, or at least a first look, they really cleaned up on the deal.
It is going to be fun watching this one develop.