Wedbush Securities analyst says takeover 'cannot happen'

Pachter: EA Nexon deal a ‘silly rumor’

The report which surfaced today claiming that Nexon has made a takeover bid to buy EA is a ‘silly rumor’, according to analyst Michael Pachter.

The report by a South Korean newspaper caused EA stocks to shoot up by six percent, but some think it’s all sound and fury.

Pachter, an analyst for Wedbush securities, is among them.

He provided Games Industry International with the following summary of his reasons the report signifies nothing.

"Nexon’s market cap is around $8 billion, and their CEO owns over 50% of the stock. Float is around $1.5 billion," wrote Pachter.

"If they did a stock-for-stock deal for EA at $20 (very unlikely that this would be the price), they would have to issue shares bringing their market cap to $14 billion (assuming they hold their price, also very unlikely), and the CEO’s stake would drop to around 30% of the combined entity."

Pachter does not believe the EA CEO would relinquish that control, and contintued, "EA shareholders won’t take Nexon shares, because they would likely drop a ton when the float goes from $1.5 billion to $8 billion."

"EA management would recommend against an offer below $25 (where stock traded in October in a weaker market) and likely would reject an offer below $30," he explained.

"Nexon would be the acquirer, and would attempt to run a company with $6 billion in revenues that is in mobile, social, MMO and packaged goods, all things Nexon has never done before, at a size 4x their current size."

The analyst also believes that since EA would not control the company, too many employees would leave.

The news should be just as bad to Nexon shareholders.

"There are few, if any synergies, and no reason to believe that Nexon could run EA’s assets more efficiently. Nexon shareholders would own a completely different company than what they bought in the December IPO,"

"My takeaway is that this deal cannot happen. Nexon couldn’t pull off a stock-for-stock deal for the reasons above, and would have difficulty financing an all-cash deal to make EA shareholders happy. If it did, it would have around 50% of its market cap in debt, and there would be a tremendous amount of skepticism about whether Nexon could manage EA’s assets any better than EA management currently does."

As far as Pachter is concerned, this rumor is just that, "Silly rumor."

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