PopCap’s Big Moment: Acquisition or IPO, with Pitfalls and Promise Either Way

Whether it forges ahead with previous hopes for an IPO, or jumps at an acquisition, it’s clear that Seattle-based PopCap Games is unlikely to leave 2011 without being transformed. The question is, which outcome is better for PopCap?

Just a few days ago, the storyline seemed pretty clear. Profitable for years and with few investors to please, PopCap had finally reached $100 million in sales. Now, with the market for technology IPOs coming back to life and competitors like Zynga and Rovio pushing interest in casual games to new heights, leadership told virtually anyone who would listen that it was time to test the waters for a public sale.

Then, as happens frequently amid deal-making, a juicy rumor hit the tech press: TechCrunch, close to the sources of many Silicon Valley deals, reported that PopCap was in talks for a $1 billion-plus buyout from Electronic Arts. PopCap dismissed it as rumor and speculation, but didn’t deny. It could be true, half-right, or just somebody trying to hang a bigger price tag on the company.

So while we wait to see what actually happens, let’s step back and look again at the information at hand.

PopCap has laid out plenty on its own. The company went on a “we might IPO” tour earlier this year, meeting with bankers, analysts, and reporters to lay out selected financial information and talk about the company’s culture and plans for the future.

PopCap’s leaders said that hitting the public market was driven by a desire to ramp up long-term growth plans, not about cashing out. Even just before the rumors of a buyout at a $1 billion price leaked this week, the company’s line was still strongly about doing the thing that would allow it to maintain its vision and pace.

And why not? PopCap has been profitable since its inception, only raising outside financing once, when it took $22.5 million from Meritech Capital Partners and angels in 2009. The company’s revenue growth has been solid, and cash in the door was about $100 million last year.

Of course, that’s the kind of thing every company says. Nobody’s going on a road trip to New York and telling the press that they can’t wait to finally buy a big boat, a Tesla roadster, and a new house on the water. But PopCap is also no trend-of-the-moment startup: The company has built its portfolio methodically, and now has some 400 employees worldwide, with offices on three continents. It has been praised for managing the transition to online and mobile games without going too wild or losing a grip on its franchise titles.

“They had good foresight and have been aggressive in getting into new regions and onto new platforms, I think, ahead of other people on the causal side,” says Billy Pidgeon, a senior analyst at M2 Research. “They really stand head and shoulders apart form the rest of the casual games universe.”

That story seems to argue for a public sale—the executive team and core talent are fairly likely to be happy and stay in place, and although you have to answer to a whole bunch of new bosses, at least your people are still in charge of pulling the levers day to day.

On the other hand, there’s an entirely new kind of pressure in having to meet Wall Street’s expectations. Roberts has talked about the perils of getting the stock market to understand the way PopCap wants to do business, virtually shuddering at the thought of being seen as a manufacturer with investors overly interested in the pipeline of new products.

In that light, maybe a buyout isn’t so bad—provided it’s structured to give your team autonomy. Such arrangements are no longer rare, Pidgeon says, pointing to the merger of game labels Activision and Blizzard, a tie-up that allowed Blizzard to maintain its independence.

“I do think that’s the new model. If you’re going to acquire, you have to make sure you’re giving the studio you’re acquiring complete creative freedom because you’re buying their legacy. You want that to continue—like Disney and Pixar. You’ve got to let them do what they do best,” Pidgeon says.

As for potential buyers, Think Equity analyst Atul Bagga wrote that EA was an unlikely candidate. EA has previously downplayed the idea of big-dollar purchases in meetings, Bagga wrote, and has even repeated that publicly: He pointed to this Bloomberg report from late last year, in which CEO John Riccitiello lamented the high prices of potential buyout targets, saying “I don’t need a billion-dollar acquisition.”

Bagga also notes that PopCap has said about half of its business is from desktop and console games. Bagga said EA would be more interested in the social, online, and mobile sides of PopCap’s portfolio, which he estimates brought in upwards of $30 million last year—not much when weighed against that rumored $1 billion price tag.

“I think potential acquirers could be Japanese companies (DeNA, Gree) that are trying to grow outside Japan and outside feature-phones; or larger media companies,” Bagga wrote.

And finally, here’s how PopCap’s Roberts addressed the possibility of a buyout instead of going public in a February Q&A with The Seattle Times’ Brier Dudley:

“Anything could happen. We’ve been talked about as an acquisition target a lot over the years. The goal is kind of the same. We’re trying to build a legacy of great enduring games. If that is better done with an IPO, we’ll do an IPO. If there’s an acquisition that makes sense for that—and the right partner was there at the right time—we might do that. But we don’t really change our business based on either one of those.”

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