Analyst Pachter: Videogames Safe from Financial Crisis
Posted: Thu Sep 25, 2008 8:51 pm
Analyst Pachter: Videogames Safe from Financial Crisis
The growing global financial crisis fills the daily headlines and nightly newscasts. With the entire financial sector looking fragile and Wall Street retreating at a breakneck pace -- the Dow Jones Industrial Average now hovers near 10,000, down almost 30 percent from the 14,000-point range it stood at only a year ago -- public concerns for the broader future of the economy have reached a fever pitch. The astounding $700 billion bailout plan now considered by Congress leaves no doubt as to the gravity of the situation. In testimony before the House Budget Committee on Wednesday, Peter Orszag, director of the U.S. Congressional Budget Office, offered this dire appraisal should Congress fail to act on the crisis: "You would have a financial-market meltdown that would cause very severe dislocations...maybe on the magnitude of the Great Depression."
That's a sobering thought. We wondered what impact, if any, the fallout from the struggling economy could have on multimillion-dollar publicly traded gaming companies. For some professional insight, we turned to one of the more recognized financial analysts in the gaming sector, Wedbush Morgan Securities' Michael Pachter.
On the matter of tumbling stock prices, according to Pachter, major publishers stand in good shape thanks to a combination of solid cash reserves and no debt. "I don't think that share price makes much difference to the publishers' operations over the near term," he says. "None of them are in a position to have to issue new stock in order to get their business done, at least not over the next two years."
With banks and other financial companies seeking refuge in various forms of mergers and acquisitions, we asked Pachter whether the game-publishing business would see further consolidation as a result of the money crunch. He points out that the Blizzard/Activision deal constituted a merger of equals, with less than 10 percent of total value of the exchange coming in cash. With that deal closed, he thinks the future looks quiet. "I'm not sure that there's much in the way of continuing consolidation or ongoing merger negotiations after EA dropped its bid for Take-Two."
As for the tightening in the lending market, Pachter sees that as little consequence over the next two years for the same reason that publishers are resilient to a dip in stock prices. "All of the [top] publishers [like Take-Two, THQ, EA, Activision, and Nintendo] have sufficient cash to fund their operations," he says. As for the smaller publishers such as Atari, Midway, Eidos, and Majesco, Pachter details the strategic moves made by each: "Atari/Infogrames just completed an innovative deal with Namco Bandai, and Eidos recently received a capital infusion. Midway factored its receivables with its parent company, and Majesco did a private placement [financial terminology for when a company goes into debt with a private entity such as individual or institutional investors -ed.]. All should have sufficient cash to fund operations for the next year or so."
In conclusion, Pachter offers this prediction: "I don't think that the market meltdown will impact game delivery for a couple of years, if ever." While that news won't rescue your 401(k), you can at least look forward to Heavy Rain, Alan Wake, God of War 3, and other upcoming big-name titles to help soothe the pain.
Garnett Lee - 1up
The growing global financial crisis fills the daily headlines and nightly newscasts. With the entire financial sector looking fragile and Wall Street retreating at a breakneck pace -- the Dow Jones Industrial Average now hovers near 10,000, down almost 30 percent from the 14,000-point range it stood at only a year ago -- public concerns for the broader future of the economy have reached a fever pitch. The astounding $700 billion bailout plan now considered by Congress leaves no doubt as to the gravity of the situation. In testimony before the House Budget Committee on Wednesday, Peter Orszag, director of the U.S. Congressional Budget Office, offered this dire appraisal should Congress fail to act on the crisis: "You would have a financial-market meltdown that would cause very severe dislocations...maybe on the magnitude of the Great Depression."
That's a sobering thought. We wondered what impact, if any, the fallout from the struggling economy could have on multimillion-dollar publicly traded gaming companies. For some professional insight, we turned to one of the more recognized financial analysts in the gaming sector, Wedbush Morgan Securities' Michael Pachter.
On the matter of tumbling stock prices, according to Pachter, major publishers stand in good shape thanks to a combination of solid cash reserves and no debt. "I don't think that share price makes much difference to the publishers' operations over the near term," he says. "None of them are in a position to have to issue new stock in order to get their business done, at least not over the next two years."
With banks and other financial companies seeking refuge in various forms of mergers and acquisitions, we asked Pachter whether the game-publishing business would see further consolidation as a result of the money crunch. He points out that the Blizzard/Activision deal constituted a merger of equals, with less than 10 percent of total value of the exchange coming in cash. With that deal closed, he thinks the future looks quiet. "I'm not sure that there's much in the way of continuing consolidation or ongoing merger negotiations after EA dropped its bid for Take-Two."
As for the tightening in the lending market, Pachter sees that as little consequence over the next two years for the same reason that publishers are resilient to a dip in stock prices. "All of the [top] publishers [like Take-Two, THQ, EA, Activision, and Nintendo] have sufficient cash to fund their operations," he says. As for the smaller publishers such as Atari, Midway, Eidos, and Majesco, Pachter details the strategic moves made by each: "Atari/Infogrames just completed an innovative deal with Namco Bandai, and Eidos recently received a capital infusion. Midway factored its receivables with its parent company, and Majesco did a private placement [financial terminology for when a company goes into debt with a private entity such as individual or institutional investors -ed.]. All should have sufficient cash to fund operations for the next year or so."
In conclusion, Pachter offers this prediction: "I don't think that the market meltdown will impact game delivery for a couple of years, if ever." While that news won't rescue your 401(k), you can at least look forward to Heavy Rain, Alan Wake, God of War 3, and other upcoming big-name titles to help soothe the pain.
Garnett Lee - 1up