Electronic Arts soars on AOL deal

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Electronic Arts Inc. (Nasdaq: ERTS) rocketed 16 percent Monday after the company inked a five-year partnership with America Online (NYSE: AOL). Warburg Dillon Read also upped its price target on the stock.

On Monday, Electronic Arts announced a partnership with AOL, and said it would create a tracking stock for its Internet gaming business. Shortly after the deal was announced, Warburg Dillon Read LLC analyst Michael Wallace raised the 12-month target on Electronic Arts to $125 from $90.

Shares in the video game maker were up 11 3/8 to 103 11/32. The stock has been doing well since Electronic Arts beat estimates in its second quarter. AOL shares were up 3 7/8 to 162 1/2.

Electronic Arts also said it had agreed to buy Kesmai Corp, a gaming division of News Corp. (NYSE: NWS). Both AOL and News Corp. will buy some of the new Electronic Arts tracking shares.

The company said it will deliver its current online games and interactive entertainment content, as well as unique content just for AOL. Electronic Arts will guarantee $81 million to America Online, over the term of the agreement. No other financial arrangements were disclosed. Under the deal Electronic Arts will be exclusively responsible for content on the AOL Games Channel and for all game content on America Online brands AOL.COM, CompuServe, Netcenter and ICQ.

A new gaming site will be launched on the AOL service next summer with a broad offering of products and services for game players of all ages and interests, the companies said. Electronic Arts will provide similar content with a simultaneous relaunch of its own Web site.

Electronic Arts also formed a separate business division for online gaming and would issue new shares tracking the division's performance.

America Online will buy 10 percent of the new class of stock and warrants for an additional 5 percent. A News Corp. unit will buy another 5 percent, and the remaining shares will be retained by Electronic Arts and employees of the new division. Terms of the stock sales were not disclosed.

In related news, Microsoft Corp. (Nasdaq: MSFT) said Monday it signed a licensing agreement with America Online to supply software components to run the latest games and multimedia features on a non-exclusive basis. Microsoft was up 3 3/16 to 89 3/16.

The Microsoft-created components, called DirectX 7.0, are built into the Windows operating system and are used by software programmers to develop games with enhanced three-dimensional graphics, sound effects and high speed performance.