‘Possible buyers for Eidos’

[You can find the original version of this article here]

If ongoing trade rumors are any indication, however, there may be little need to rush out and print new letterhead. Recent rumors have been circling that SCi/Eidos is on the block and the list of potential suitors includes EA, Ubisoft, Square Enix and Warner Brothers. Other bigger game companies could be interested too. Is there truth in the grapevine?

A Look Back

During the mid to late 90’s, Eidos was a high flying prospect with a soaring stock price. The company, which had started as a software shop focused on compression and editing tools, was buying up PC game developers. In 1995, Domark, Simis and Big Red Software became the foundation of the re-focused Eidos Interactive. In ’96, Core Design, the makers of the original Tomb Raider title, joined the mix.

The console market, then booming on the strength of Sony’s Playstation and the marketplace’s concurrent acceptance of CD-ROM games over cartridges, became Eidos’ rocket ship. But, between 2000 to ’04, Eidos fell back to earth; their luster lost.

In August of 2004, under cash pressures and with mounting losses, the company began discussions to partner or sell out.

Elevation Partners, at the time a relatively new private equity firm launched by a mixture of experienced investors and corporate executives, was among the first to come knocking. Elevation offered around $135m (71) plus added operating capital in an all cash deal.

With financial pressure looming, and a 50m operating loss posted during the prior six months, Eidos’ seemed poised to accept. On March 21st, 2005, Reuters even went to the wires with a story that the deal was done. It wasn’t.

SCi Entertainment had made a competing bid that shareholders favored. They seemed to believe there was more upside in SCi’s 76.1m stock swap than Elevation’s cash. Elevation withdrew in April and SCi won the prize. Eidos was theirs to fix, if able. Some were skeptical they wouldn’t be.

Electronic Arts CEO John Riccitiello, then a managing partner at Elevation and one of the lead architects in their bid for Eidos, was one of the critics. He was quoted saying that while SCi is a successful company, it has little experience of integrating larger businesses, of running a major international video games company or in managing significant intellectual properties.” (viaGamasutra.com)

Riccitiello’s crystal ball proved frighteningly accurate. Barely two years later, SCi was back in the headlines as takeover bait. The company confirmed talks were ongoing with potential buyers in September 2007.

By January 2008, the talks with unnamed parties broke down. Shortly thereafter, SCi’s CEO and other key executives resigned under heavy shareholder pressure.

On and off for the past year since, while SCi/Eidos has tried to turn itself around, acquisition rumors have persisted and kept the company’s name in the press.

Today, Eidos employees more than 600 people and is the largest game developer and publisher based in the UK. The company’s Tomb Raider, Hitman and Deus Ex titles remain recognized hits and widely known brands.

Despite the name recognition, though, the company is struggling to right the ship. New management has cut staff and weak titles – all part of a restructuring process – but the market cap has sunk from more than 500m to less than 50m in a year. 60m in working capital had to be raised to keep things running smoothly.

When SCi’s preliminary annual report was published in September, the company reported an EBIDTA loss for the year ended June 30th of 99.1 on revenue of 118.9m. Even attributing much of that to restructuring, the process of restoring the company is slow going and that’s only compounded by the broader economy and more narrow issues facing the UK game industry.

A recent report from the UK’s National Endowment for Science, Technology and the Arts (NESTA), citing a skill shortage and funding crisis, projects the nation’s game builders will drop from third to fifth in 2009 global rankings of top game developing countries; outpaced by growing game development in Korea, Canada and China. (Full NESTA report in PDF available here)

Speaking about the report, Eidos creative director Ian Livingstone told GI.biz that despite the creative and technical talent that exists in the UK, in the last six years half of the independent development studios have closed or have been bought by foreign companies who see greater value in our studios and intellectual property than we do ourselves.” The UK,” he continued, is become a work-for-hire nation.”

Like John Riccitiello’s forecast for SCi’s prior management, could Livingtone’s comments be a prophetic statement about the future of SCi/Eidos too? Maybe. SCi/Eidos has great brands and solid development credentials. With the weak markets and their present market value, it’s easy to see a potential buyout.

The Suitors
If SCi/Eidos (hereafter just Eidos”) really does end up in the hands of new owners, the most frequently mentioned candidates are Warner Brothers Interactive Entertainment (Time Warner), EA, Ubisoft, and Square Enix. How do they all stack up? Here’s the short take:

Warner Brothers Entertainment (WBE)
Far and away the front runner, WBE and Eidos have been partners since shaking hands in a 2006 joint investment and distribution agreement. The deal made WB Interactive both Eidos’ primary North American distributor and it gave Eidos licensing rights for properties including Batman, Looney Tunes and the Hanna Barbara Catalog. The deal also made WBE a sizable shareholder in the Eidos.

As of October 16th, following a 5m share purchase reported the day before, WBI held 16.13% (42.5m) shares of Eidos. Yesterday, a new filing revealed they’d increased their holdings by 10m more shares (purchased on Dec 12) giving them a 19.92% stake in the company.

These purchases hav