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Has EA's Management Been Sniffing (around at) GLUU?

Electronic Arts (Nasdaq: ERTS), one of the largest game software and mobile gaming companies in the world, is said to be considering an acquisition of cross town rival Glu Mobile (Nasdaq: GLUU). While this is not the first time such talk has surfaced, the timing and concurrent market action have added some air of possibility to the rumors.

Glu Mobile is the third largest mobile gaming company behind Electronic Arts and Gameloft, but unlike ERTS and Gameloft, Glu is 100% mobile gaming focused while the other two have significant console based game software offerings. Prior to going public almost two years ago, it was rumored that several firms including ERTS, Activision (Nasdaq: ATVI) and even Apple (Nasdaq: AAPL) were looking to buy Glu prior to the IPO. No such takeover materialized and GLUU came to market at a price of $11.50 per share, giving the company a market cap of approximately $327 million. In the 20 months since going public, GLUU has completed several acquisitions of its own, the most significant of which was its purchase of MIG Entertainment, the largest mobile gaming company in China. Despite showing significant gains in revenues, the company has struggled to reach profitability and its stock has cratered as a result, falling to a market cap below $10 million at one point as worries about its declining cash position and future earn out payments owed to the founders of MIG Entertainment caused investors to punish the shares. As is often the case in a down market, year end tax loss selling begat more selling and before long the stock was trading well below the value of the cash on its books.

Over the past week, rumors again began to surface that Electronic Arts management was considering an acquisition to bolster their mobile gaming presence in Asia.


The timing here is key as it appears that mobile gaming is going through a transition from traditional cell phones as the platform to new smart phones that have significantly greater gaming functionality and potential, the worldwide economy seems to be slowing dramatically and there is an expectation that there will be a low double digit contraction in revenues for Glu next year. We believe that this is the exact timing that ERTS or another deep pocketed player would be looking to make an acquisition. ERTS, Gameloft, Activision and the other big well funded players in the broader gaming space recognize and appreciate the lull that is currently expected - they have traditionally experienced this same type scenario when new console platforms are being introduced. These larger players also have the cash cushion to weather a downturn in revenues for a few years and have a keen ability to appreciate the upside that can be experienced when that transition period has passed.
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