Little games could see big deals after EA deal

By David Lawsky

SAN FRANCISCO (Reuters) - Electronic Arts Inc's (ERTS.O) purchase of Playfish shines a spotlight on an increasingly lucrative segment of the computer games market, one likely to see more deals.

Playfish, along with Zynga and Playdom, are three start-up companies that have been generating buzz because they make free social games and earn money by selling virtual goods to players. The popularity of these games has taken off because of online networks like Facebook and MySpace.

EA, a traditional publisher of videogames like "Madden NFL," will shell out $275 million in cash for Playfish, along with other consideration that may boost the company's valuation to $400 million over time.

EA said on Monday that the deal valued Playfish at three to four times forecast fiscal 2011 revenue -- a multiple that will probably set a benchmark for Zynga, Playdom and other social game makers, should they come to market.

"It's like a domino effect -- if one falls there's a chance the others could fall soon," said ThinkEquity LLC analyst Atul Bagga. "I think the company that might get acquired is Playdom, and there are a host of smaller companies that could be candidates for acquisition."

Instead, later in the day a group of venture capital firms put $43 million of new investment into Playdom, valuing it at $260 million.

"It's such a big space you don't want to be constrained by your cash flow," Jeremy Liew, managing director of venture capital firm Lightspeed Partners, said of the profitable firm. Lightspeed joined New Enterprise Associates, Norwest Venture Partners and one of the original investors, Rick Thompson, in making the new investment.

Playdom Chief Executive Officer John Pleasants said in a statement: "We're not interested in acquisition at this point -- we're focused on growing Playdom into a world-class gaming company."

Players of the company's games range from 13 to 80 and come from more than 150 countries, Pleasants said, "so the opportunity for growth is tremendous."

Meanwhile, Bagga said Zynga "has been a candidate for an IPO for some time, and there could be an IPO next year."

Zynga, maker of Zynga Poker and the FarmVille farming game, is generating revenue at an annualized rate of more than $200 million, according to two sources with knowledge of the company.

Its venture capital backers include Kleiner Perkins Caulfield & Byers, Foundry Group, Union Square Ventures, Institutional Venture Partners and Avalon Ventures.

The speculation in the industry is that Zynga is too expensive for a strategic buyer, but could raise $1 billion to $1.2 billion in an initial public offering next year, should it choose to undertake one.

Zynga Chief Executive Officer Mark Pincus told Reuters the company had no plans to go public or change ownership.

"I want to build a long-term sustainable company, an Internet treasure," he said. "I don't see how selling the company or taking it public would accelerate that mission now."