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"Consolidation crush": 5 drivers of $12.5B games acquisitions
by Tim Merel on 07/14/14 03:26:00 am   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

The last 12 months have seen a record $12.5B games acquisitions across mobile games ($4.6B), MMO games ($4B), games tech ($2.8B) and console games ($1B), as detailed in Digi-Capital’s new Global Games Investment Review Q2 2014 (download at www.digi-capital.com/reports). There are 5 drivers of this “consolidation crush”.

  1. Mobile growth – acquirers buying into a large, high growth market

Digi-Capital forecasts that mobile games will hit $33B revenue globally in 2017, after growing from $4B in 2011 to $16B in 2013 (or ¾ of global app revenues). Large markets growing this fast are rare, so corporates are buying mobile games companies to capture more of it for themselves. For example, Chinese giant Tencent bought 28% of C J Games for $500M, and Ourpalm bought Playcrab for $285M.

2.Mobile cannibalization acquirers stopping mobile insurgents from eating their lunch

Mobile has cannibalized other media usage dramatically (print -33%, online -23%, radio – 14%, TV -10% 2012 vs 2013). Digi-Capital forecasts that mobile games will drive 2/3 of all games software market growth, delivering $100B total software revenue by 2017 (the remaining growth coming from online). Console, PC, MMO, social and web games are being cannibalized by mobile in terms of usage, revenue and development talent, with major corporates future proofing their businesses by acquiring both within and across sectors. Zynga bought Natural Motion for $527M, also admitting that Supercell had “eaten its lunch”.

3.Regional realignment acquirers leveraging their strength to dominate at home and abroad

Digi-Capital forecasts mobile/online games combined will produce $60B revenue by 2017, with $38B in Asia and $13B in Europe. North America remains important, but its historic position from the console legacy is waning. China, Japan and South Korea boast multi-billion dollar games companies that Westerners hadn’t heard of 5 years ago, with Tencent the most valuable games company on the planet at >$150B market cap (bigger than Intel, Cisco and HP). High profits and dominant ambitions led Asian buyers to make 9 of the top 10 games M&As in 2013, up from 8 out of 10 in 2012. Europe’s renaissance has also seen King, Supercell and Wargaming emerging as global leaders. Softbank’s $1.5B acquisition of 51% of Supercell, twinned with GungHo, is an example of what pan-regional visionaries can achieve.

4.Legacy pivots acquirers buying their way into the future

The advent of the web and now mobile have proven that pivoting to address disruption is standard operating procedure for survival. Facebook did this in a surprising way when it bought Oculus for $2B to address potential virtual reality disruption, after initially being slow to react to mobile (and then successfully pivoting). In Asia, there have been online to mobile games pivots (e.g. Smilegate acquiring 20% of Sundaytoz for $112M), and traditional telecoms and book publishing pivots to mobile/web games (e.g. Chinese Universe Publishing & Media/Elex Tech $434M, Datang Telecom/Yaowan Yule $278M, Tangel Publishing/Beijing Magic Universe $206M).

5.Market cycle acquirers taking advantage of the current phase in the investment cycle

Many publically traded games companies are at significant discounts to 12 month highs, valuations for games M&A have softened somewhat, and only $472M was invested in games in the first half of 2014 (vs $2B for full year 2012). There were 2 UK based IPOs in 2014 (King and Game Digital), with the Chukong IPO reported to have been postponed due to valuation concerns. Some think games market assets are undervalued, with Giant Interactive taken private for $1.6B, and a proposal to take Shanda Games private for a reported $1.9B. Others think trade exits might be preferable to IPOs in the medium term, so this phase of the cycle is a good one for major games acquirers.

All acquisitions should be made on their merits, but understanding the 5 drivers of the recent bull games acquisitions market could help to decide when (and how) to sell your games company. With timing critical, are you ready?

About Digi-Capital (www.digi-capital.com): Digi-Capital advises mobile, games and digital clients across America, Asia (China, Japan, South Korea) and Europe.


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Comments


Craig Timpany
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In case anyone else is wondering, yes, 100% of the total makes up only 300 degrees of the pacman pie chart.

Darius Drake
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My comprehension of this article was on and off as I read each sentence one at a time. But looking up the unfamiliar terms let me grasp its meaning. Lots of business vernacular, I see.

I have a valid question. If mobile games seem to be doing great, what types of game companies are going private and taking trade exits?

Also: "Some think games market assets are undervalued." What are you referring to when you say "game market assets"?

And could you reword this sentence in a way that a person who isn't fluent in business parlance could understand?: "Many publically traded games companies are at significant discounts to 12 month highs" along with this sentence: "valuations for games M&A have softened somewhat."

Please understand, I'm trying to learn about this field. Thank you.

Tim Merel
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@Craig Timpany: Thank you for pointing that out!

@Darious Drake: Thank you for your questions, and we forget the business language can be a bit opaque. We'll address that in future.

Question 1: This article might be helpful http://dealbook.nytimes.com/2014/03/16/giant-interactive-a-chines
e-web-video-game-operator-agrees-to-3-billion-buyout/?_php=true&_
type=blogs&_r=0

Question 2: You could say "games companies" instead.

Question 3: You could say "some share prices are lower" and "some acquisition prices are lower".

It's great that you're learning about this field, and (if you're interested) there are many posts on our blog which might be helpful www.digi-capital.com/news

Have fun!

Darius Drake
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Okay, that helps. Thank you.

Just one more thing: I'd like to know specifically what the phrase "significant discount to 12 month highs" means, if you'd elaborate on that a bit more (I know it's referring to the companies shares like you mentioned).

Right, have fun. :)

Tim Merel
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@Darius Drake: You're welcome.

You could also say "some companies' share prices are lower than their highest price in the last 12 months". Say a company's shares were trading at $10 per share 6 months ago and that was the highest they had been in the last year. If today those shares are trading at $9 per share, the shares are effectively trading at a 10% discount to their high point in the last 12 months.

And absolutely on the fun part :)

TC Weidner
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too much money chasing anything that smells of any type of decent yield. What we see here is what happens at peak bubbles.

Rafael Brown
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Umm, so where does the US$2 billion sale of Oculus by Facebook fit into this? And yes, it will have non-gaming dividends down the road, but if anyone thinks the sale won't for all practical purposes be about games and its impact on the gaming medium over the next 2-5 years then you haven't noticed (a) who's gone to Oculus in the last year (game devs), (b) who's buying kits (mainly game devs), and (c) who's announcing Oculus support (mainly games). VR will eventually be a 'thing' well beyond games, eventually, but the early adoption will be all about games. So yes, a $2bn investment in tech that really should be tracked as VR seems an odd thing to miss especially given that its sale has generated stories about Valve, id Software, ZeniMax, Facebook, Kickstarter, Oculus and has boosted the profile of Sony's Project Morpheus (and all other VR projects out there announced or unannounced).

Tim Merel
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@Rafael Brown: Thank you for your question.

The Facebook/Oculus deal appears in the post under "4. Legacy Pivots" in the sentence "Facebook ... bought Oculus for $2B".

Mark Zuckerberg explained why he bought Oculus in this Facebook post https://www.facebook.com/zuck/posts/10101319050523971

Hope that helps!

Nooh Ha
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@Tim I'm struggling to get even close to $12.5bn using public transaction databases filtering for M&A. Are you using the term "acquisition" (which I regard as the purchase of one company by another) as a synonym for transaction (i.e. including IPOs, minority investments etc.) by any chance?
Thks

Tim Merel
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@Nooh Ha: Thank you for your question.

All the transactions making up the $12.5B are detailed in our full 173 page Global Games Investment Review Q2 2014 at www.digi-capital.com/reports. We see many transactions from all regions (Asia, America, Europe) which are not always captured by others (with no disrespect to your other sources). The $12.5B figure is purely mergers and acquisitions, as we detail all games investments and IPOs separately in the Review.


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