Electronic Arts Shares Surge On Microsoft Takeover Chatter

http://online.wsj.com/article/BT-CO-20090923-710843.html?mod=rss_Hot_Stocks

SAN FRANCISCO (Dow Jones)--Shares of Electronic Arts Inc. (ERTS) surged Wednesday on stock trader speculation that Microsoft Corp. (MSFT) was considering buying the videogame maker,

Both companies declined to comment on the market speculation, which also was rattling trading in Electronic Arts options, but industry analysts were skeptical about the fit.

"Speculation Microsoft would acquire Electronic Arts is ridiculous, just ridiculous," Janco Partners analyst Mike Hickey, explaining that Microsoft - maker of the Xbox videogame console - is developing its own videogame technology that doesn't require controllers and that buying a traditional software publisher didn't seem to fit those plans.

Hickey thought the talk may reflect the market's expectations of consolidation in the fragmented videogame industry.

Electronic Arts shares recently rose 8.9% to $20.17 on more than twice its average daily volume over the past 30 days. The stock hit a high Wednesday of $20.33, the first time it was above $20 in more than a month.

Microsoft shares added 1.6% to $26.17.

Also helping Electronic Arts shares was an upbeat note from Lazard Capital Markets, which said company executives gave an upbeat assessment of the prospects for the videogame industry in a meeting between the firm and company.

However, the gains by Electronic Arts seem driven by the takeover speculation. Volume in Electronic Arts calls - options contracts that give the holder a right to buy shares at a specified price - also skyrocketed. Activity in calls often rises when a company is in an industry expected to consolidate.

Specifically, traders flooded to Electronic Arts' October $20 and $21 calls initially and have since moved out to October $22 calls priced at 21 cents a share. Electronic Arts would have to gain more than 10% by expiration next month for those higher priced call options to be in the black.

Electronic Arts, best known for its sports videogames like Madden football, has been mentioned by analysts as a possible takeover target. Meanwhile, Microsoft - which has loads of cash and is involved in many areas of technology - is frequently rumored as a potential buyer.

Traders noted that this specific rumor has been around for nearly two years, given perceived synergies between the companies, and may be picking up steam Wednesday because of other recent deal activity. For example, Walt Disney Co. (DIS) recently said it was buying comic book publisher Marvel Entertainment Inc. (MVL), Dell Inc. (DELL) announced it was buying Perot Systems Corp. (PER) and Adobe Systems Inc. (ADBE) unveiled plans to buy Omniture Inc. (OMTR)

William Lefkowitz, chief options strategist for vFinance Investments, said, "This jump in options is out of control because people are looking to be involved again. All you have to do is mention I'm hearing this, and people are willing to put money towards that idea."

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