Being a publicly listed company is generally not a good fit for games businesses.
That’s blunt, and it may sound a little harsh or unnuanced, but it’s not just me saying it. This was the widespread sentiment that I probably found most surprising when I first started out as a business reporter in this sector and began speaking to senior executives.
These were people who ran publicly listed firms, and in some cases the very people who had chosen to bring those firms public in the first place. But time and time again, people in these positions would say – sometimes in private and sometimes quite openly – that the company’s IPO was one of their biggest regrets.
The temptation of an IPO is financial, of course. It can be an immense injection of cash for a business, not to mention a very welcome payday for investors, executives, and employees. A well-timed and well-managed IPO can boost growth into the stratosphere, opening up resources to compete on a level that simply wasn’t possible for the business before.
However, the source of the regret was straightforward: after an IPO, the management of the business becomes inextricably entwined with the management of its share price, of its investor relations, and of its public statements. The steady metronome beat of the quarterly earnings report becomes the company’s heartbeat.
For some businesses, that’s absolutely fine. It can even be positive, a good way to focus eyes and minds on clear goals. For creative businesses, however, it can be an incredibly onerous thing to deal with. At worst, it can result in a very damaging mis-alignment of the company’s objectives.
After all, games are developed on multi-year cycles, and they are a creative endeavour – and thus inherently stochastic to some extent, because “make it fun” isn’t a task that fits easily and neatly into a Gantt chart. Sometimes games need extra time to find the fun. But that’s a hard decision to make if everything you do has to be aligned with a quarterly and annual earnings schedule.
Sometimes creative teams need to explore and to take risks – a hard thing to do when everything needs to be transparent and explained to sceptical major shareholders representing banks and pension funds.
All those expressions of regret about being publicly traded – nuanced, of course, by gratitude for the opportunities that IPO cash had created – came back to mind this week when it was announced that EA will be going private in a $55 billion deal.
This is the biggest leveraged private equity buyout in history (where leveraged means that a very large amount of debt is being taken on to fund the deal, thus creating “leverage” for the buyers). Although of course in simple dollar terms it’s less than the $75.4 billion Microsoft paid for Activision Blizzard a couple of years ago.
Most of the positive or optimistic comments about the deal have focused on the fact that EA will no longer be answerable to shareholders and bound by those metronome ticks of quarterly reports. In theory, at least, this should free up the company and its creative teams, allowing them to think about their games and development cycles in more strategic, long-term ways, rather than having to constantly keep an eye on the upcoming quarter’s numbers.
That’s a fair thing to be optimistic about; it links in to all those comments I’ve heard over the years about the problems of being a publicly listed games company. Granted, the scale of a company like EA provides a lot of insulation from those issues – the companies that really struggle with being publicly listed are smaller firms with only a handful of games in development, for whom delays can mean entire quarters with little or no revenue at all.
Still, even a company as big as EA could benefit from being able to step back and think about its business and products in a long-term and strategic way, rather than nervously watching its share price movements all the time.
Let me go back to that whole “leveraged” thing, though, because that’s extremely important.
A lot of coverage this week has focused on who’s behind the buyout – the Saudi sovereign wealth fund PIF (which already held around 10% of EA), along with technology investment group Silver Lake and Affinity Partners, an investment group led by Donald Trump’s son-in-law Jared Kushner. It’s a motley crew for sure, and concerns over the political intentions of groups which will now control some of the world’s biggest entertainment media brands are certainly valid.
What’s arguably even more important though isn’t who’s doing the buyout, but how they’re doing it. This is a wildly different kind of deal to the one Microsoft did to acquire Activision Blizzard. Microsoft paid cash, dipping into its extensive war chest for the acquisition. PIF, Silver Lake, et al. are also paying a lot of cash for EA – around $35 billion – but the remaining $20 billion is being borrowed, meaning that the newly private EA will be saddled with a debt burden almost three times higher than its annual revenues.
In other words, EA may not need to answer to shareholders any more – but it will be replacing them with creditors. The drumbeat of the quarterly report and the nervous eye on the share price will fade away, but I’m not exactly convinced that the need to service a $20 billion debt will be any less onerous. For reference, EA’s operating profit in FY2024 was about $1.5 billion, so the debt it is taking on in this deal is more than 13 times its annual profit.
In practice, these kinds of leveraged buyouts by private equity usually happen when the investors believe a couple of key things. Firstly, that the business has very stable, predictable revenues – a major factor in being able to consistently service a large debt burden. That’s arguably more true for EA than for most games companies given its broad line-up of annual sports titles, but “stable and predictable revenue” isn’t historically the games industry’s strong point, making EA quite an unusual risk profile for this kind of deal.
The second thing investors generally believe when entering leveraged buyouts is that not only are revenues stable, but that there are cost savings to be made. This is common to private equity deals in general; these firms generally believe that they can implement significant cost-cutting and efficiency measures at the businesses they take over, often pushing through significant restructuring plans soon after the deal.
This doesn’t always go very well for the businesses involved. One infamous strategy is to use leveraged buyouts to acquire companies with very significant fixed assets – such as retail chains which own the land and buildings their stores are located in – and then sell off the assets to help repay the debt, with the company now leasing back the assets it used to own. Great for the people who made money from the deal; awful for the company’s ongoing business, now permanently burdened with high rental costs.
A more general cost-cutting strategy is also likely, which means job losses
In EA’s case, its most valuable assets are its brands, and it will be interesting – and a little concerning – to see how the new management strategy will handle those assets financially. A more general cost-cutting strategy is also likely, which means job losses – another blow after years of layoffs across the industry. In the long term, the private EA that emerges from this is likely to be a less risk-taking company, simply because controlling its cost base and keeping its revenues steady and predictable is going to be crucial to handling that debt burden.
The positive thing for the company is that it will very much be one of the jewels in PIF’s crown in terms of media franchises, and the Saudi fund will be keen to maintain it as a prestige publisher – an instinct that will probably protect EA from the worst excesses of private equity asset stripping.
Nonetheless, even with the onerous nature of being a publicly traded company lifted – and even given that EA has struggled to find growth in the past few years, so some kind of change was certainly needed – it’s hard to see this as a cause for anything but the most cautious of optimism. A publisher needing to report to the markets may have their incentives misaligned, but a publisher needing to report back to the financiers to whom they owe $20 billion is one carrying a far heavier burden still.