It’s been 36 years since “Barbarians at the Gate” hit bookstores. That book turned the RJR Nabisco buyout into a cultural moment. Now we have a new record holder.
Electronic Arts just agreed to go private in a $55 billion deal. It’s the largest leveraged buyout in history. And it’s worth comparing to what happened in 1989.
The Numbers
Silver Lake, Saudi Arabia’s Public Investment Fund, and Affinity Partners are putting up $36 billion in equity. J.P. Morgan committed $20 billion in debt financing. EA shareholders get $210 per share, a 25% premium.
RJR Nabisco went for about $25 billion back then. Adjust for inflation and you’re still looking at something smaller than EA. But the similarities matter more than the size.
Why These Deals Worked
Both companies had predictable cash flows. RJR had tobacco and food products. People bought Oreos and cigarettes regardless of the economy. EA has sports franchises like Madden and FIFA. Gamers buy them every year.
That’s what private equity looks for. Stable revenue. Strong margins. Products that generate cash without massive capital expenditure.
What Changed
The RJR deal was messy. Management tried to buy the company themselves. A bidding war broke out. KKR won with a lower guaranteed offer because the board didn’t trust management’s incentives.
The drama around executive compensation and golden parachutes defined that era. Congress held hearings. People questioned whether LBOs served anyone besides dealmakers.
EA’s buyout looks different. No public bidding war. No management trying to cut themselves in. The board evaluated one offer and took it. Sovereign wealth funds are involved, which wasn’t common in 1989.
The Junk Bond Era vs Today
KKR used high-yield debt to finance RJR. Junk bonds were relatively new as an LBO tool. Michael Milken at Drexel Burnham Lambert pioneered the market. It was controversial.
Today, leveraged finance is standard. Banks structure debt packages. Private credit funds compete with traditional lenders. The EA deal uses $20 billion in debt, but nobody’s calling it reckless.
Interest rates matter here. The RJR deal happened when rates were high. EA benefits from years of low rates and the expectation that the Fed will cut soon.
What It Means
Gaming is now attractive enough for the biggest private equity play ever. That says something about how investors view tech-driven content businesses.
RJR showed that any company with cash flow could be a target. EA shows that tech companies with recurring revenue are the new blue chips for buyouts.
The market has matured. What shocked people in 1989 is routine now. Sovereign wealth funds deploy capital globally. Private equity firms write checks that would have seemed impossible.
But the basic logic hasn’t changed. Historically, leveraged buyouts have involved acquiring businesses with stable cash generation, using debt as a financing tool, and aiming to manage the company so that it can service its obligations and potentially provide an eventual exit opportunity.
Questions Worth Asking
Can EA’s revenue stay predictable in private hands? Sports games depend on licensing deals with leagues. Those deals can change.
What happens to game quality when a company optimizes for cash flow? EA already has critics who say it prioritizes monetization over innovation.
And what does this mean for other gaming companies? If EA can command this valuation, others will attract interest. More consolidation seems likely.
The RJR deal ended badly for KKR initially. They eventually made money, but it took restructuring and asset sales. Large LBOs carry risk. Bigger isn’t always better.
End Game
EA’s buyout is historic by size. But it follows a playbook written decades ago. Find cash flow. Add leverage. Take it private.
The gaming industry just became the newest candidate for this old strategy. We’ll see if it works better than it did for tobacco and cookies.
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