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The games M&A market
September 2005 (First appeared in Develop)
Anyone that has a business interest in the games industry will have
probably noticed that the games mergers and acquisitions (M&A) market has been frenetic over the last 18 months. In fact, there has been more buying and selling of games companies and assets in the 18 months to
June '05 (72 deals) than there were in the whole of the five years that preceded it (70 deals). So what the hell is going on?
Well, for a start, it might not feel like it but
there is currently more money sloshing round the industry than ever before. Over $2.5bn has been raised for stock exchange-listed games companies in the West since the start of the decade (during the same period
privately-held companies have raised a remarkable $870m). This fund-raising activity has contributed to a combined Western listed publisher balance sheet (excluding Microsoft and VUG) that currently boasts $4.3bn in
cash and short-term investments, and long-term debts of just $650m (almost all belonging to Ubisoft and Infogrames/Atari). Western publishers are therefore sitting on $3.6bn in net liquid (i.e. easily spendable)
assets. The last 18-24 months also has seen many of the larger publishers' share prices reach a 5-year, if not all-time, high. Since cash and shares are the currency used to buy games companies, publishers recently
have been happy to splash out using either.
Two other factors have contributed to this acquisitions feeding frenzy.
The rapid market growth in network gaming and mobile
gaming in particular has precipitated a flood of investment by venture capitalists into companies specialising in these areas. An astounding 71% of the $870m raised for privately held games companies since 2000 has
gone into network games companies. This has both fuelled M&A-based consolidation activity within these sectors as well as introduced increased pressure for companies to sell thanks to VCs' investment objectives
(i.e. achieving rapid and profitable exits). The result has been a mini investment and M&A bubble around mobile gaming (now the largest and fastest growing of the network games markets) with demand for good
investment and acquisition opportunities easily exceeding supply. One recent acquisition worth noting was the $140m acquisition of Blue Lava Wireless by Jamdat earlier this year. "Blue Lava who?" I hear you say.
Blue Lava has the 15-year exclusive rights to the mobile edition of Tetris and last year generated $12m in sales and an estimated $2m in net profit. That represents acquisition multiples of roughly 11x sales and 70x
profit. An acquisition of Rare proportions it would appear.
Finally, for companies operating in the traditional
games sector, the last 18 months have represented the peak of the current video games cycle. Publishers have therefore been expanding their internal development capability to maximise their margins (i.e. reduce
external royalty payments) by acquiring studios that they are already working with. These studios have proven themselves to the publishers and have established their pedigree on current platforms. We estimate that
the number of such studio acquisitions will drop off sharply during the transition period as the market falters and publishers pause to see which independent developers emerge as potential winners on the next-gen
platforms.
So what does this mean for developers?
The acquisition tap is on full at the moment due to
cyclical and financial reasons. Most recent valuations vary from reasonable to excellent because the developers that are being acquired are themselves benefiting from the cyclical boom and are in strategically
strong positions. For those independent developers that are considering a sale, now is the right time to do it as the start of the next cycle will see publisher demand for product reduce and their acquisitions tap
get turned down, if not turned off until they have better visibility of the next cycle's pattern of growth. For mobile games companies, there has never been a better time to sell. The valuations being achieved
range from very good to ludicrous but are universally higher than those for traditional video games companies and there remains a surplus of quality buyers over sellers.
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