PopCap Picked EA as Its New “Zomboss” After Intense Bidding War

Electronic Arts may end up spending as much as $1.3 billion in order to acquire PopCap, but both leadership teams say it was the complementary nature of the businesses and the overlap in cultures that ultimately got the deal done.

EA’s CEO John Riccitiello sent a letter to all employees today, explaining that in recent months, PopCap received a lot of offers, including bids from other game companies. Separately, we heard other bidders at the table were likely Zynga, and other companies in Asia looking to expand to the U.S., such as Tencent or Renren. [Update: Learn more about Zynga’s $1 billion offer here.]

But ultimately, both leadership teams tell me that the deal closed because of the synergies between the two companies.

A much less serious letter was sent from PopCap to EA, highlighting just a little bit of the company’s personality, which has developed such hit titles as Bejeweled, Plants Vs. Zombies and Peggle. The letter was addressed to the EA humanz, and thanks the company for becoming its new “Zomboss.”

We are happy to service you! We do not mean to serve yr brainz like on a platter, so delishus and cold. That would be a misinterpretashun….We are also very happy yr games do not have plantz. Love, yr new Zombie pals at PopCap.

Despite the kinship being felt between the two companies, investors were not overly thrilled with the deal. EA’s stock dropped 22 cents in after-hours trading to close at $24.17.

The company’s stock performance has been a sore subject for the company. Its market cap is running at around $8 billion, whereas three-year-old Zynga plans to go public shortly to raise $1 billion at a much loftier valuation.

In an interview, Riccitiello’s feelings on the subject were pretty obvious.

“We compete with them [Zynga] in one channel and we crush them everywhere else. We’ve wanted to catch-up and beat them in social.”

Between EA’s Playfish division, which is focused on social, and PopCap, he thinks that they can easily get to 20 million monthly active Facebook players in the next few months. “They [Zynga] are still a lot bigger than we are, but I want to get in punching distance so we can rival them in their space,” he said.

The purchase of PopCap represents a fairly sharp contrast to the picture that Riccitiello was painting only a few months ago, when he said that they were focusing on smaller acquisitions going forward.

But he’s not apologizing for the sudden shift in strategy. “A bad CEO sticks to a wrong thing,” he said. “I agreed with it at the time, but the opportunity was too great.”

PopCap’s CEO Dave Roberts said the sale to EA is also a dramatic course change for PopCap, which was “steaming down the path” of an IPO. “We knew we’d get some inbound traffic, but it was a fully competitive process that took me by surprise. At the end of the day, we know we can accomplish more with EA than by ourselves. EA does some things really well that we don’t do so well, and we make content that they’ve never tried to make. … It elevates us beyond what we could have done on our own over the next five years.”

PopCap will definitely help EA exceed its goal of hitting $1 billion in digital revenues in fiscal 2012.

PopCap’s games have been installed and played more than 150 million times on platforms such as Facebook, RenRen, Google, iPhone, iPad and Android. In calendar year 2010, about 80 percent of PopCap’s revenue was on high-growth digital platforms.

PopCap’s revenues grew 30 percent in 2010 compared to the year earlier, and in the first quarter revenues jumped by 40 percent. Riccitiello said what’s really interesting about the company’s performance is that PopCap’s margins are expanding much faster than their revenues because of their performance on Facebook and iOS.

Riccitiello said about a quarter of the total industry revenue for games comes from mobile, social, tablet and casual PC games today, and that he expects that to rise to 50 percent or more in the coming five years.

In those terms, how can EA afford not to go big?

Jay Hoag, the founding general partner of Technology Crossover Partners, which is an institutional investor in EA, tells us that the acquisition makes a lot of sense. Just like with Netflix — which he has also been an investor in for many years — sometimes the value is not readily apparent.

“I like the company [PopCap] a lot. EA has made substantial progress on console and digital, and this only enhances their muscles in the digital world, especially social and mobile, which is seeing some pretty impressive growth.”