AIM AT ELECTRONIC ARTS
Copyright 2002 www.thestreet.com
[ June 5th 2002 ]
been no shortage of action the last couple of
days in game software publisher Activision. Activision
shares jumped Tuesday to a 52-week high after
the company posted stronger-than-expected earnings,
showing that its business is growing even faster
than the rest of the revved-up video game industry.
But the stock gave back those gains Wednesday
as the company rolled out plans to cash in on
its recent success with a 7.5 million-share offering.
said that in setting up the offering, Activision
is making a bold gamble that it can topple market-share
leader Electronic Arts. Raising cash will gird
the company for a costly run at Electronic Arts,
some analysts said - although others warned the
company's earnings would be diluted by the offering.
Activision slid $3.12, or 9%, to $31.49 Wednesday.
Other stocks in the sector sold off more mildly
as Wall Street reassessed the industrywide picture.
about Activision started heading toward fever
pitch at a very strange time Tuesday. After the
stock added 10% during the trading day following
Activision's strong earnings and a boost to its
2003 financial guidance, the company issued two
late-day press releases laying out its plans to
raise some $250 million in a stock offering through
several analysts said Activision was most likely
just responding as quickly as possible to a fast-moving
market opportunity, the timing of the releases
- at 10:38 and 11:28 p.m. EDT - was certainly
unusual. Most companies announce stock offerings
and other meaningful corporate news within a few
hours of the start or the close of the trading
day. "We try to release it when we felt everything
was completed," Activision CFO Bill Chardavoyne
said in an interview.
wrinkle in the deal arose when Merrill Lynch slammed
the deal, saying it hurt earnings. "We believe
the transaction is dilutive, which should reduce
potential 'upside' to our EPS estimates," wrote
Merrill Lynch analyst Justin Baldauf, who maintained
his neutral rating. Merrill Lynch and UBS Warburg
were originally tapped to underwrite a smaller-scale
offering late last year, but were eventually replaced
didn't immediately respond to a call seeking comment.
But Chardavoyne said, "They make their independent
decisions, as other firms do." In any case, Activision's
surprise helped drag the sector down. Electronic
Arts shares fell $1.31, or 2%, to $62.97. THQ
shares fell $1.49, or 4.61%, to $30.80. Take-Two
Interactive dropped 35 cents, or 1.3%, to $25.85,
and Midway dipped 32 cents, or 3.3%, to $9.29.
the selloff, some analysts were staying the bullish
course on the company. Investec games analyst
Jim Preissler notes the deal will nearly double
Activision's cash reserve. That's good because
potentially lucrative movie licenses such as those
to Sony's Spiderman can cost upwards of $40 million
to $50 million before development costs. Given
the prospect of greater head-to-head competition,
Wall Street has recently taken to speculating
that Electronic Arts and Activision could be preparing
a shopping spree for midtier players, including
Acclaim, Eidos, Infogrames and Midway.
getting pricey to compete with EA - not only to
acquire developers, but also to acquire grade-A
licensing content," Preissler said. "Not too many
of these companies can take that kind of hit."
Activision was coy on that point. "The significant
amount of cash ... puts us in a very competitive
position," said Chardavoyne, declining to speculate
on potential acquisitions. He added that the company
is on the lookout for "intellectual property and
of the big gamemakers is expected to heat up in
the second half, heading into the holiday season
as most of the major publishers ready its blockbusters.
EA's trump card will be games based on Lord of
The Rings and its highly anticipated updates on
The Sims. Activision will be releasing updates
on games based on Star Trek, X-Men and Tony Hawk.