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Extreme M&A - Part One
June 2007 (first appeared in Develop)
A recent contract Games Investor Consulting won called
for us to peer into our industry databases to trace the corporate ownership of some of the UK's most successful games Intellectual Property. Our M&A (mergers and acquisitions) database goes back 17 years and
includes a number of transactions which would not have raised an eyebrow at the time but which today stand out as astonishing examples of either good luck and vision or bad luck and poor judgement.
Over the space of several forthcoming columns, I want
to take a look, with the gloriously unfair benefit of hindsight, at some of the more extreme examples of successful and unsuccessful transactions to identify their drivers and rationale and to see whether any
lessons can be learnt. I want to start with the curious history of Scottish developer DMA Design.
Founded in 1988, DMA had quickly established itself
as a AAA-quality developer creating, amongst titles, the 10m+ selling Lemmings franchise for Psygnosis. Between 1996 and 1999, after 8 stable years as an independent, DMA went through four different owners in quick
succession. In late 1996, DMA sold themselves for £4.2m to IPO-seeking UK publisher Gremlin. DMA had already signed the rights to other publishers for its two products in development at the time, Body Harvest and
Grand Theft Auto, so Gremlin were essentially acquiring a high quality developer and the potential net royalty flow from these titles rather than any released games IP.
GTA was published in 1997. The long-term publishing
rights had been acquired by BMG's games publishing division and the game generated over 630,000 unit sales and some useful profits for Gremlin. DMA had been recruited by Nintendo to develop Body Harvest, another
original IP, intended as a key N64 launch title. Unfortunately, the game was beset with delays and other development problems which lead to Nintendo selling the publishing rights to Gremlin. However, when it was
eventually released the game failed to meet sales expectations contributing to Gremlin having to issue a profits warning and ultimately to its sale in 1999 to Infogrames for £21m, less than its flotation value,
Despite its long-term track record, the commercial
success of the first GTA and the imminent arrival of its sequel, DMA was deemed surplus to Infogrames' requirements. 2 months after acquiring Gremlin, Infogrames sold the entire DMA share capital to Take 2 for the
princely sum of £1. OK, so Take 2 also had to assume some $12m of debt that had been stuffed onto DMA's balance sheet by Infogrames (who were clearly eager to package up and dispose of a series of what it considered
liabilities).
That Take 2 had acquired the global publishing rights
to the GTA games from BMG in 1998 was key as Infogrames, like Gremlin, would only have ever received royalties from the GTA games whilst this publishing status quo remained.. From Take 2's point of view, however, it
was a coup and was arguably the most successful acquisition in industry history. Stripping out estimated product development costs and assuming a full repayment of the assumed debt, it represents an approximate
150-times return on Take 2's investment. Thus far.
So what can we learn from this? Firstly, that an IP
per se can be valued by publishers as more important than the people that create that IP and that often publishers can be blinded to those developers' potential. It demonstrates the critical importance of initial
publishing rights, irrespective of whether the IP is owned by the publisher. It shows the difficulties of valuing games early in the lifetime of the franchise and confirms that identifying valuable games IP is the
product of not only luck but also a great deal of skill. Timing was critical – the GTA story would probably have been very different if Infogrames had not sold DMA which, if it had waited until GTA 2 had gone on
sale (it sold 1m units), it might have done. However, it was Take 2's persistence, vision and crucially its ownership of the publishing rights that ultimately won out.
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