EA completes its acquisition of Respawn Entertainment

Over the weekend, Electronic Arts finalised its acquisition of Respawn Entertainment, and the studio is now officially under the EA banner. Last month EA announced it was purchasing the studio for a princely sum of $455 million, and the announcement came only a few weeks before the loot box controversy and EA’s appearance at the Credit Suisse 2017 conference to discuss its finances and the way forward. Now that the deal is done, we can talk about what it entailed and why Respawn decided to sell.

According to media reports the final price was $455 million, but this wasn’t quite accurate. Under the agreement, EA has committed to paying $151 million up-front for the studio in cash, with an additional $164 million in stocks to Respawn’s employees, which will vest in about four years. Therefore, the deal aims to keep Respawn’s employees from leaving the studio en masse – if they do so before 2022, they forfeit the stock payouts. The rest of the money is also held back and only paid under certain conditions. The remaining $140 million will come in the form of additional cash consideration – paid to employees – and is contingent upon the achievement of certain milestones in the studio’s performance in developing new titles. Respawn already has another Titanfall game on the way, as well as a game set in the Star Wars universe, and a VR title.

So EA has only really paid $151 million for a AAA game studio that has had two successful games under its belt. This is an interesting move because it gives the company the ability to add a new IP to its collection. Titanfall is immensely popular with the gaming community, and it’s a great arena-like shooter. It partially solves EA’s problem of having a drought of new franchises, as the only other new thing it’s doing is Anthem, a Bioware title. But there’s another thing that’s interesting about the deal mentioned in EA’s announcement that it made back in November that makes sense now.

The acquisition is expected to be neutral to EA’s net income in fiscal years 2018 and 2019.

Now, I’m not an accountant, nor do I have years of experience in an executive role at a AAA game publisher. Heck, I barely read anything from the Wall Street Journal or Financial Times. But that line there is telling – EA already was going to bankroll Respawn’s next three titles and publish them in 2018 and 2019. “Neutral to net income” in the next two fiscal years means that it already had made allowances in their GAAP and Non-GAAP accounting records for assisting Respawn Entertainment with development costs. This changes nothing in terms of its economic outlook in the next two years because this money was going to be paid over anyway.

EA effectively now own Respawn Entertainment and didn’t really pay a cent for it. The publisher got a studio for free.

There are a lot of people (myself included) decrying the move on the internet because this is how studios get killed by EA. They get absorbed by the company once successful, publish two or three titles via EA’s platform, and then a new direction takes over and the games the studio makes changes forever. Maybe we’ll see that happen sooner because of EA’s eagerness to put loot box mechanisms and microtransactions in all its published titles. However, if you were Vince Zampella, and you were reading the terms of the agreement, you’d realise you’ve struck gold. So long as the studio meets its development commitments and pushes out quality games on time for the next four years, it’ll be paid out $304 million in cash and stocks just for doing its job.

And as of late 2017, Respawn Entertainment had 207 employees. That’s a maximum of $11.25 million paid out per employee, and everyone should become a millionaire in just four years. You’d have to be mad to turn down that kind of money.

Via Electronic Arts, EA Investors.


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