Square Enix: Social-media game companies overvalued

Square Enix Holdings Co., the creator of the "Final Fantasy" video-game franchise with more than $1 billion in cash, said it's reluctant to pursue acquisitions of social-networking software developers because they're too expensive.

Instead, the company is more interested in developers of software related to micropayments and security, Square Enix President Yoichi Wada told reporters in Tokyo today. He declined to name any potential targets.

"Valuations of social-networking games companies like Zynga have reached unreasonable levels, putting them outside of our scope," Wada said, referring to unlisted Zynga Game Network Inc., the top developer of games for Facebook Inc. users. "Social networking game software makers are overvalued."

Square Enix's concerns come as the popularity of Facebook led Google Inc., Walt Disney Co. and Electronic Arts Inc. to buy companies that develop games for social-networking websites in the past year. The deals have assigned "significant premiums" to gaming companies, according to Jeff Rath, an analyst at Canaccord Adams Ltd. in Vancouver.

Square Enix rose 1.5 percent to close at 1,780 yen on the Tokyo Stock Exchange today. The shares have lost 8.9 percent this year, compared with a 16 percent retreat by the benchmark Nikkei 225 Stock Average.

$2 Billion FarmElectronic Arts's $400 million purchase of Playfish Inc. in November valued the target company at 5 times revenue, while Walt Disney's plan to buy Playdom Inc. for $563.2 million implies a 15 times price-to-sales ratio, Rath wrote in a report on Aug. 3. Companies on the Nasdaq Composite Index traded at an estimated 1.5 times sales, according to Bloomberg data.Zynga, creator of games including "FarmVille," is valued at about $2 billion, or four times estimated sales, according to Canaccord. Zynga received a 13.5 billion yen ($159 million) investment from Japan's Softbank Corp., two people familiar with the agreement said in June.Revenue at Zynga may exceed $450 million this year, two people who've been briefed on its financials said in April. Games played on social networks are free, with the makers of the titles generating revenue by selling virtual goods, such as tractors for "FarmVille" or machine guns for "Mafia Wars."Google earlier this month bought Jambool Inc., a provider of virtual-currency software and Slide Inc., a maker of games and applications for social sites. The Mountain View, California based company also invested $100 million in Zynga, TechCrunch reported in July.In April 2009, Square Enix paid 58.5 million pounds ($91 million) for Eidos Plc, the maker of "Tomb Raider" games. The Tokyo-based company bought Japanese game software publisher and arcade operator Taito Corp. for 56.1 billion yen in 2006.