Electronic Arts pays $860 million for BioWare, Pandemic Studios

This story has been updated from its original version.

In order to get back on top of the video games market, Electronic Arts is willing to pay a hefty price. Namely, $860 million.

The Redwood City, Calif.-based publisher announced on Thursday afternoon that it had agreed to acquire VG Holdings, the parent company of two game development companies, BioWare and Pandemic Studios, from private equity firm Elevation Partners.

This deal, expected to close in January and originally reported by the Wall Street Journal, is the largest in EA's 25-year history.

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Among BioWare's already-released titles are the Baldur's Gate and Neverwinter Nights series as well as a number of Star Wars titles; Pandemic Studios is also responsible for a handful of Star Wars games in addition to Mercenaries and Destroy All Humans. But of greater interest to EA are the ten upcoming games in the two companies' collective pipeline, including Mercenaries 2 and the hotly anticipated Mass Effect.

"Mass Effect has an enormous amount of buzz right now," said Brian Crecente, editor of gaming blog Kotaku. "Of everything that (EA) is snatching up, it's by far the most important acquisition."

EA is in need of a blockbuster. In July, research firm The NPD Group released figures showing that it had been toppled from its number-one position in video game sales for the first time in over a decade; rival Activision had cruised ahead, fueled by the success of the blockbuster Guitar Hero franchise that it obtained when it purchased publisher Red Octane in 2006. From January through June of this year, the NPD stats showed Activision raking in $397.8 million in sales in comparison to EA's $365.7 million.

"It's all Guitar Hero," Crecente said of Activision's recent winning streak. "I don't think Mass Effect is Guitar Hero, but Mass Effect is in my mind a very, very big title."

"I think this transaction is a big plus for EA," CEO John Riccitiello said in a call with investors and analysts on Thursday. It's also a very intimate deal for Riccitiello, who had left his CEO post at EA in 2004 to become a founding partner in Elevation; he returned to the top spot at the video game publisher this past April.

It didn't take long for Riccitiello to close his first deal with his former partners at Elevation, who include famed Silicon Valley investor Roger McNamee, former Apple CFO Fred Anderson, and Irish troubadour Bono. He's no stranger to Pandemic or Bioware, having been responsible for bringing those two studios into the Elevation fold in 2005. As a result, even though he wasn't involved in the financial negotiations, he's very well versed in the history and potential of what the two studios can bring to EA.

Not only may the deal strengthen EA, but Riccitiello will probably personally benefit from the deal. He remains an investor in the Elevation Partners fund, and could stand to make $4.9 million on the deal following the distribution of the profits to fund shareholders, according to a filing EA made with the Securities and Exchange Commission Thursday. That payout could fall if Elevation doesn't do as well with its investments over the remainder of the year, the filing said.

Bret Pearlman, managing director and co-founder of Elevation, said EA was in a competitive bidding situation for the two studios down to the wire, although he declined to name the other suitors. He also declined to specify how much Elevation invested in VG Holdings over the time it was owned by Elevation.

The deal marks the second high-profile move for Elevation in the last several months. In June the firm closed a unique deal for 25 percent of Palm, which has struggled trying to extend the success of the Treo as other rivals have regrouped.

In this new deal, Elevation is receiving about double what it originally invested in BioWare and Pandemic, which the firm acquired individually under Riccitiello's auspices before merging them into VG Holdings. EA will pay up to $620 million in cash to VG's stockholders, about $155 million in equity to select VG employees, and will assume approximately $50 million worth in VG stock options as well as lend the game company about $35 million.

In the short term, the deal will knock about 30 cents to 40 cents off EA's net profit for the 2008 fiscal year, the company said in a press release. But on the conference call, executives said the deal is expected to add to EA's earnings during its fiscal 2009 year.

Gaming insiders say it's a good move for the company. "EA is acquiring two pretty strong publishers," Crecente said. But gaming fans might think otherwise. "For whatever reason, I guess because EA's a large company, there is an enormous amount of backlash," he observed. "I think the problem is that gamers' biggest fear is that a good franchise will come under the control of a sort of corporation mentality that cares more about money than it does the product. Whether or not that's really true with EA is debatable."

Crecente pointed out EA's famous Madden NFL football title, which it revamps and re-releases every year in order to drive up sales.

EA spokeswoman Tammy Schachter insisted, predictably, that gamers have nothing to worry about with the BioWare/Pandemic Studios acquisition. "Being part of the EA family won't change the creative side of these games," Schachter said. "It will only open up the publishing and distribution opportunity for the games."

But enthusiasts like Crecente say that it's still troubling as a few huge companies control an increasingly bigger share of the games market. "It's like Hollywood in that the more you have this conglomerate sort of mentality. I think it dampens creativity if you only have a couple of publishers out there," he said. "The likelihood of a studio coming up out of nowhere and coming up with a blockbuster, I think, is less possible."

CNET News.com's Tom Krazit contributed to this report.