The Acceleration of Gaming M&A

By Amarins Laanstra-Corn, Roshni Padhi (Stanford University), Gurneek Gill (University College London), Mustafa Bayramli (University of Pennsylvania)


I. Background

The gaming industry has become the fastest-growing form of entertainment in the world, outshining both the music and the movie industries. Compared to $41.7 billion in revenue generated by the film industry and the $19.1 billion in revenue generated by the music industry, the gaming industry generated $152.1 billion in revenue last year, and that number is projected to eclipse $200 billion in 2021. This amounts to a CAGR of 13.4% through 2023. There are a few industry-wide trends that have been responsible for this astronomical growth.

First, there has been a shift from device-centric technology to player-centric technology, i.e. a player can play the same game on multiple different devices thanks to an increase in device compatibility. This has gone hand-in-hand with the rising popularity of mobile gaming as opposed to console gaming.

Second, the Supreme Court struck down a law that deemed sports betting illegal in most states. Following that announcement -- which took place only two years ago -- nineteen states have legalized sports betting, with more states likely to follow. These legal tailwinds have contributed to additional revenue in the gaming sector.

Third, augmented reality (AR) is likely to be at the forefront of the gaming evolution, and this transformation will be largely aided by the availability of 5G coverage, which will allow developers to create fully immersive experiences without sacrificing speed or quality. For example, Qualcomm has reported that it will be releasing 5G phone-tethered AR headsets, and they will not be the only ones taking advantage of this trend.

While these three trends have propelled the industry forward on a longer-term basis, the fourth trend has been the most significant in terms of recent industry developments, especially on the M&A front. The pandemic, by forcing people to stay at home, has caused 81% of people in the United States to play games while in quarantine. This rise in consumer engagement is evidenced by industry-wide revenue highs; for example, Unity Technologies reported a 59% YoY increase in mobile game ad revenue this April, with a similar rise in in-app purchases.

II. Zynga/Rollic

In contrast to several other sectors that have been severely affected by the pandemic, the gaming industry has shown far more resistance to the COVID-19 pandemic. Over the past year, Zynga’s stock price has risen by 60.30%; thus, it is no surprise that the American social game developer has been able to acquire Istanbul-Based Rollic, a leader in the fast-growing hyper-casual games business, for approximately $180 million. This deal provides strong evidence to suggest that the pandemic-driven rise of the gaming industry will not just be temporary, and it cements Zynga’s position as the ‘largest western mobile-game company’.

By acquiring Rollic, Zynga can diversify their business, particularly in the form of advertisement. However, Zynga has seen a slight 14% slip in share price since its peak in July. A similar drop has been experienced by many of Zynga’s competitors too, such as Glu Mobile and Electronic Arts. This drop is thought to be related to Apple’s anticipated iOS update which is expected to hamper ad-tracking technologies on their devices thus impeding advertisement effectiveness. Should this be the case, this could directly affect game download and in-game advertisement, given the volume of Apple devices that mobile games are played on. Consequently, the strategic rationale behind Zynga’s acquisition of Rollic is clear to see since Rollic generates most of its revenue from ads and they don’t use Apple’s Identifier for advertisers in player acquisition. Therefore, acquiring Rollic may be an effective way to overplay the financial distress that Apple’s update may cause to Zynga’s own ad revenue.

Moreover, this deal gives Zynga an entry into the hyper-casual game category. This type of game is fast growing and has been for a while, even before the gaming industry boost from the stay-at-home economy that has evolved during the pandemic. Voodoo achieved more mobile-game downloads last year than any other publisher and boasts a strong portfolio of hyper-causal games. Zynga will hope to add this success to their business model by acquiring Rollic, who has a strong range of hyper-casual games on their profile and are one of the market leaders in this rapidly growing category.

Overall, Zynga’s acquisition of Rollic reflects the current power of the gaming industry. Further to this, it consolidates upon their $1.8 billion acquisition of Peak Games so they can continue to expand their market share. The combination of Zynga and Rollic’s talented teams of developers will help Zynga continue to dominate an industry that is looking to continue its current rate of progression.