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Is Battered EA A Takeover Target?

According to BusinessWeek, Electronic Arts, the world's largest third-party video game developer, "is spending too much making video games for systems that cost too much for consumers, and its newer titles aren't hooking gamers." In other words, EA may be ripe for a sale.

On Dec. 9, the Redwood City, Calif, company said it would miss fiscal year profit and sales forecasts. As a result, shares tumbled immediately, and just about every analyst covering EA lowered their rating of the company's stock. "Just when investors began to believe that things couldn't get worse, they did," says Wedbush Morgan analyst Michael Pachter. "Investors remain skeptical that management is on the right track."

Where has EA gone wrong? For starters, the company has "a nagging propensity to overspend on games," says Todd Ringwald, a senior analyst at Signal Hill. EA releases 35 to 50 titles a year and spends 27% of sales on research and development. Its chief rival Activision Blizzard releases just 15 titles and spends 10% on R&D. Elsewhere, the video game giant has overestimated demand for Sony's PS3 and Microsoft's Xbox 360, creating too many titles for those systems while Nintendo's cheaper Wii outsells them both by a margin of 2 to 1. Moreover, EA is struggling while the rest of the video game industry thrives. U.S. retail sales for hardware and software are on pace to generate record sales of $22 billion this year, according to NPD Group. Meanwhile, EA's stock continues to take a beating, suggesting that the time might be right for someone like Disney to take it over.

Read the whole story at BusinessWeek »

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