Updated from 5:09 p.m. EDTVideo-game publisher Electronic Arts ( ERTS) said it plans to buy two game development studios for $860 million in a bid to strengthen its position in one of the games industry biggest genres: online role-playing games. EA said it will pay up to $620 million in cash to stockholders of VG Holding, the company that owns the two studios, BioWare and Pandemic, and will issue up to an additional $155 million in equity to certain employees of VG Holding. The equity stake will be subject to time-based or performance-based vesting criteria, said EA Chief Financial Officer Warren Jensen. EA also has agreed to lend VG Holding up to $35 million through the closing of the acquisition, and will assume $50 million in outstanding VG stock options. VG Holding is owned by private-equity firm Elevation Partners, the former employer of EA's CEO, John Riccitiello. In a subsequent 8-K filed Thursday with the Securities and Exchange Commission, EA revealed Riccitiello continues to have a stake in Elevation and as a result of the studio sale could reap a return "up to $4.9 million at the time of partnership distributions in the future, if any." The transaction is expected to close in January 2008. Shares of EA were recently off 2% in after-hours trading to $57.50. Including charges, the acquisition is expected to hurt EA's fiscal 2008 results by about 30 cents to 40 cents a share. Excluding charges, the purchase will hurt EA's fourth-quarter results by about 5 cents a share. The purchase will break even in fiscal 2009 and add to earnings after that. BioWare and Pandemic Studios have 10 franchises under development, including six entirely owned by them, said EA.
But the biggest key to the deal is BioWare's early development of a massive multiplayer online game in its Austin, Texas, studio. EA is hoping the game will give the company the edge against popular online games such as World of Warcraft and science fiction game, Tabula Rasa, that have become a phenomenon among gamers. BioWare is also currently developing a game Mass Effect, which will be published by Microsoft ( MSFT), in November. Pandemic Studios and BioWare employ about 800 people across four studios located in Edmonton, Canada; Los Angeles; Austin; and Brisbane, Australia.