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Gaming M&A

By Mustafa Bayramli (Wharton), Gurneek Gill (UCL), David Summers (London School of Economics)

Photo: Venson Chou (Unsplash)


I. Industry Background

With gaming becoming increasingly popular in a world without in-person interaction, the global revenue for the industry rose 20% to $175 billion in 2020. Despite widespread uncertainty, M&A activity for companies operating within video gaming has participated in $13.2 billion worth of investments, growing 77% year-on-year. Incumbent technology companies, including Amazon and Alphabet, are expected to shape cloud-based gaming as the future of the industry.

The Entertainment Software Association established that 65% of American adults play video games - showing a paradigm shift in the demographics of gaming as millennials age; supporting this has been the development of the capabilities of mobile devices as a viable platform. When breaking the market down, over 58% of the revenue split between mobile (smartphones and tablets), PC and console, is generated via mobile gamers. This has grown from 46% in 2015 with an annualised rate of 22%, outpacing overall gaming revenues which have annualised growth of 15%. This theme is consistent within the M&A activity within the industry, with Zynga’s $1.8 billion acquisition of Peak Games and Electronic Arts’ $2.1 billion acquisition of GluMobile as highlights.

Deal flow within the video game sector was at an all-time high in 2020, with 220 M&A transactions taking place - a 10% increase above dealmaking in 2019. It shows a growing opportunity for businesses to gain market share ahead of further growth in innovative technologies such as artificial intelligence and virtual reality.

II. Microsoft - ZeniMax Media

On 21st September 2020, Microsoft Corporation announced a proposal to acquire ZeniMax Media Inc., an American video game holding company, which is set to expand Microsoft’s portfolio from 15 to 23 games studios. The statement was released only a week after Microsoft had failed in their bid to purchase TikTok and so the tech giant will now hope that this deal will boost their ever-developing gaming business. The acquisition of ZeniMax Media will crucially include its game publisher, Bethesda Softworks, so Microsoft will hope to continue to benefit from the pandemic-driven wave for home entertainment via the supplementation of ZeniMax Media’s gaming franchise, which consists of a notable portfolio of games and technology with an excellent reputation for success. Thus, it is clear to see why Microsoft paid a substantial $7.5 billion in cash for ZeniMax Media, which will seamlessly integrate into and improve Microsoft’s Xbox Game Pass by adding even more quality differentiated content to it. Similarly, ZeniMax Media will look to scale alongside Microsoft to further their ambition to “empower more than three billion gamers worldwide”.

The Gaming marketspace has seen huge surges in previous years so it is no surprise to see Microsoft at the forefront once again, after having been heavily involved in gaming M&A through previous acquisitions of Obsidian Entertainment and Ninja Theory. With the industry forecasted to bring in over $200 billion in annual revenue in 2021, the positive effect of the pandemic on this industry is very coherent as it looks set to reverse two successive years of decline in gaming M&A global volume. As consumer spending in the video gaming sector increases, valuations will likely continue increasing and so in turn, more video gaming M&A will be seen, remaining at a higher price per deal.

III. Electronic Arts - Codemasters

On December 14th, a month after Take-Two Interactive Software, Inc. offered nearly $1 billion to purchase Codemasters, Electronic Arts (NASDAQ: EA) shared its planned acquisition of Codemasters and announced that it has reached an agreement with the Board of the target. According to the deal, which was completed on February 18th of this year, EA would acquire Codemasters for £6.04 (or $8.52 as of May 14th) per share in an all-cash transaction that puts the implied EV of the target at $1.2 billion.

Despite the 25% premium that EA agreed to pay over the offer of Take-Two, the deal poses multifaceted sectoral growth and development opportunities for the company in the near and long term. Having disappointed racing fans with recent games, EA will immensely benefit from the expertise of Codemasters in the video game racing category. To put it in context, the racing franchises such as Dirt, Dirt Rally, Formula One, Grid, and Micro Machines have made the British game studio increasingly popular with the growing fan base all across the world. The combination will also help accelerate the performance of Codemasters’s creative talent thanks to EA’s distribution resources, including the acquirer’s multi-platform subscription service EA Play, and deep knowledge in live services operations, game analytics, and technology.

IV. Zynga - Peak

On Thursday 2nd July 2020, Zynga, an American social video game services developer announced the closing of their long-awaited acquisition of Peak, an Istanbul-based mobile studio. The deal is said to be worth $1.85 billion and to be paid in cash and stock by Zynga who are firmly aware of what Peak has to offer; having already purchased their casual card games studio in 2017. However, Peak Games’ perpetual growth since then has seen Zynga return for the remaining parts of their business, particularly ‘Toy Blast’ and ‘Toon Blast’ which collectively boast over 12 million active users per day and when added to Zynga’s 21 million own, will lead to a 60% increase in this figure. Nonetheless, Peak Games themselves will be pleased to have the chance to scale their business even more alongside Zynga’s presence and technical capabilities, particularly in data science. Moreover, by acquiring Peak, Zynga can bolster their international position since they are currently based mostly in the US and so the conglomerate will hope to release an exciting new product pipeline globally, to accompany their portfolio of now eight ‘forever franchises’ make it likely that Zynga’s EBITDA will rise in the coming quarter.

Mobile gaming has been instrumental in sustaining gaming sector M&A deals recently, especially before the unprecedented pandemic which drove huge, almost illusionistic, surges in the gaming industry as a whole. Mobile gaming will continue to make up a huge amount of gaming M&A in general as the pandemic comes to a close. Furthermore, similar to Zynga and Peak, these companies will be looking to benefit, on both sides of the deal as the small/medium-sized target developers gain resources to grow, whilst acquirers like Zynga expand access to additional users and games faster to strive towards profitability goals.

V. Embracer Group - Gearbox Software

Sweden-based Embracer Group AB, the parent company of Austrian video game publisher THQ Nordic, announced on February 3rd of this year that it entered into a merger agreement with Gearbox Software. The $1.3-billion Transatlantic deal would help consolidate the Frisco-based “Borderlands” developer into Embracer’s seventh operating group in the form of a wholly-owned subsidiary. The strategic rationale behind the deal is fairly clean and simple: Gearbox, a triple-A game studio that employs 550 across 3 different locations in North America, will obtain the opportunity to fuel its growth through facilitated access to capital, expansion of creative talent, and collaboration opportunities with Embracer’s 57 internal game studios. Likewise, the acquirer hopes the deal would open up further M&A opportunities in the American market to diversify the franchise portfolio, which would make Embracer a force to be reckoned with, in the gaming sector. It is worth noting that Embracer also announced its intent to acquire 2 video game publishers other than Gearbox in February 2021. The 3-company acquisition deal, with the potentially significant revenue and cost synergies, is expected to get the Embracer group one step closer to becoming a gaming powerhouse on the level of Ubisoft, Electronic Arts, and Activision.

VI. Future Outlook

Going forward, an industry based on continual innovation means that M&A opportunities are expected to arise. Whether it be incumbent gaming giants, including EA and Activision, or technology players with a growing stake in mobile and cloud gaming, consolidation offers an incentive for investment and growth in their relative market share.

Analysts and gaming fanatics alike expect cloud-based gaming to make a wave through the industry. Cloud gaming is where games are run on servers and are then streamed to a device, rather than on a local drive. For users, the main benefit is no longer needing to store games and data on your device, which can often take up over 200GB of storage after add-ons and updates. As the 3-firm concentration of the cloud infrastructure market is 61%, made up of Amazon Web Services (32%), Microsoft Azure (20%) and Google Cloud (9%), tech giants will seek growth opportunities in gaming through their portfolio of developers and service provision to the industry more broadly. To capture expertise and gain the trust of gamers, cloud providers may acquire the rights and developers of the world’s most popular games, to show credibility when developing their own.

The industry is susceptible to risks include developers being ‘one-hit wonders’, such that they depend on a single title, with negative feedback on future editions of that game may lead to the overall underperformance of the company. Additionally, the challenge of valuing gaming companies can lead to increased volatility and overvaluation of stocks in this sector; making it difficult for an investor to build their portfolio around such companies.

With mobile gaming company Skillz going public via the SPAC route after merging with Flying Eagle Acquisition Corp, at a value of $3.5 billion, there is scope for further reverse mergers as an alternative route to IPO. It presents the relevance of this space within the innovation of corporate finance products and the likely activity during 2021, which may surpass the records set in 2020.

VII. Sources


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