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Electronic Arts: Do Acquisitions Make It A Real Game Player?

Shares of video game giant Electronic Arts were riding high Friday on news of its two acquisitions--BioWare Corporation and Pandemic Studios. EA made the purchase -about $860 million of cash and stock--from Elevation Partners, which owns VG Holding, the parent company of the two studios.

Electronic Arts may be the world's largest video game publisher, with mainstream hits like the Sims and Madden NFL, but until now it had a tiny share of role playing action and adventure games (you know the ones with obsessive fans like "World of Warcraft").

This acquisition will catapult EA into that world--BioWare is working on a new massive multiplayer game, Microsoft is publishing one of its games called 'Mass Effect' (I can only imagine) next month and Pandemic has in its pipeline, "Mercenaries 2: World in Flames and Saboteur." This is Electonic Arts biggest acquisition--a sign that it doesn't just want to own the mainstream football games--it needs to step up its own game.

So what does this mean for EA's stock--ERTS? This deal will be dilutive to fiscal 2008 earnings by 30-40 cents per share. But for the quarter that just ended in September, EA plans to beat its earlier forecasts--driven by the success of those Sports franchise games.

But right after the deal was announced, Deutsche Bank epxressed some hestiancy-- maintaining its hold and $45 target. Despite all the good games the new acquisitions ad to the portfolio, Deutsche Bank says there will be a lot of volatility in the upcoming holiday selling season. This current holiday quarter comes with a lot more risk--it hinges on some of their new games taking off. And this calendar fourth quarter (EA's fiscal third quarter) generally brings in about 40-45% of EA's revenue.

Another indicator that the quarter might be tough. The consoles its games serves, aren't selling as well as expected. Despite the fact that Nintendo's Wii is HOT, EA is only the third largest supplier of games for the console.

Bottom line: this acquisition news is great for diversifying EA's portfolio, but the company still faces some challenges in the upcoming quarter, especially looking at the gains its stock has made over the past six months.

Questions? Comments? MediaMoney@cnbc.com

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.