Posts
Next year computer games will
celebrate their 50th birthday. Until 1972, computer games were academic
productions, and they entered mass circulation thanks to the game Pong. Due to
its popularity, gaming platforms were created - slot machines and consoles, and
from the 1980s also personal computers. From the 1990s, computer games began to
massively support online gameplay and three-dimensional graphics, becoming a
mass product. The last dozen or so years has been the further polishing of
sales models and the development of new platforms. Thanks to these processes,
the games quickly turned from trivia into one of the most profitable pieces of
the entertainment industry.
When the market began to crystallize, M&A appeared on it
(the first transactions over USD 100 million are still the 20th century[1]),
but their real boom has occurred in recent years. The table below shows the
list of the largest M&A transactions in this sector in history.
Table 1. The biggest
M&A in gaming industry
|
Target |
Target HQ |
Acquirer |
Acquirer HQ |
Year |
Deal value (bln USD) |
|
Supercell Oy |
Finland |
Tencent Holdings
Ltd. |
China |
2016 |
8.6 |
|
Zeni Max Media Inc. |
United States |
Microsoft
Corporation |
United States |
2020 |
8.1 |
|
King Digital
Entertainment plc. |
Malta/Sweden |
Activision Blizzard
Inc. |
United States |
2015 |
5.9 |
|
Moonton Technologies
Co. Ltd. |
China |
ByteDance Ltd. |
China |
2021 |
4.0 |
|
Mojang AB |
Sweden |
Microsoft
Corporation |
United States |
2014 |
2.5 |
|
GluMobile Inc. |
United States |
Electronic Arts Inc. |
United States |
2021 |
2.4 |
|
Oculus VR LLC. |
United States |
Facebook Inc. |
United States |
2014 |
2.0 |
|
Peak Games |
Turkey |
Zynga Inc. |
United States |
2020 |
1.8 |
|
Namco Ltd. |
Japan |
Bandai Co. Ltd. |
Japan |
2005 |
1.7 |
|
Leyou Technologies
Holding Ltd. |
Hongkong |
Tencent Holdings
Ltd. |
China |
2020 |
1.5 |
|
Playdemic Ltd. |
United Kingdom |
Electronic Arts Inc. |
United States |
2021 |
1.4 |
|
Gearbox Software
LLC. |
United States |
Embracer Group AB |
Sweden |
2021 |
1.3 |
|
Sumo Group plc. |
United Kingdom |
Tencent Holdings
Ltd. |
China |
2021 |
1.27 |
|
Codemasters plc. |
United Kingdom |
Electronic Arts Inc. |
United States |
2020 |
1.2 |
Source:
Wikipedia
As you can see, most transactions worth more than
USD 1 billion were completed in a pandemic year. The increase in the number of
such transactions means that we can wonder what the investor’s motivation were,
and I will try to answer this question in the article below.
Reason
1. Video Games market growth
As noted in the introduction, computer games began
their fight for the wallets of customers (usually younger) half a century ago -
this is when the era of slot machines began, then there were numerous
transformations, spectacular successes and no less spectacular failures[2]. After
all these evolutions and revolutions it can be said with certainty that
computer games have become a cultural and social phenomenon that equates or
surpasses the achievements and importance of other types of art. The enormous
popularity of such entertainment resulted in the emergence of enormous money in
the industry and the emergence of real electronic entertainment tycoons. Currently,
it can be assumed that the value of the video game market is more than twice as
high as the combined film and music market..
To understand how the game market works, we need
to understand how developers monetize their productions, the simplest division
is as follows:
· - Sale of game licenses
(e.g. game marketplace such as Steam or Epic Games Store).
· - F2P (Free-to-play) in
this model the game earns by purchasing additional items by players and / or watching
ads).
Usually,
however, the developers try to get every penny from the player, which is why
DLC and micropayments in paid games are now standard[3].
The
second important division is what hardware the game runs on, here the following
division is the most popular:
· - PC;
· - Consoles;
· - Mobile devices;
· - Browser games
(marginal importance, additionally its value is constantly decreasing).
Such a division of the market makes it much easier
to capture the transformations in the gaming market in recent years. The most
readable measure of gaming boom is the size of the market. Information on the
size of the market was taken from the reports of Newzoo - a consulting company
specializing in the gaming market.
Chart 1. Market size
Source:
Newzoo reports 2016 – 2021
According to Newzoo reports, the value of the
gaming market increased from less than USD 100 billion in 2016 to over USD 175
billion in 2021, reaching a CAGR of 12%. The Newzoo estimate that in 2023 the
value of the gaming market will exceed USD 200 billion. This would mean that
the growth rate of the market value will slightly decrease and will not exceed
8% year on year in 2022 and 2023. However, the growth of individual parts of
the gaming market was not even. The table below shows the breakdown of the
gaming market in 2016-2021.
Table 2. Division of the gaming
industry
|
|
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
|
Smartphone |
26.9 |
34.8 |
56.4 |
54.9 |
63.6 |
79.0 |
|
Tablet |
10.0 |
10.9 |
13.9 |
13.6 |
13.7 |
11.6 |
|
TV/Conslole |
30.9 |
33.8 |
34.6 |
47.9 |
45.2 |
49.2 |
|
Casual Webgames |
5.0 |
4.4 |
4.3 |
3.5 |
3.0 |
2.6 |
|
PC/MMO |
26.9 |
25.0 |
28,6 |
32,2 |
33,9 |
33,3 |
|
Total |
99.6 |
108.9 |
137.9 |
152.1 |
159.4 |
175.9 |
Source:
Newzoo reports 2016 – 2021
As we can see on the table, the bulk of the increase
was recorded by games for mobile devices. Between 2016 and 2021, this market
grew almost 2.5 times, reaching USD 90 billion, which give a CAGR of 19.7%. The
importance of this part of the market is also illustrated by recent
transactions with leading mobile game companies (GluMobile, Playdemic,
Playdemic).
Another segment that grew quite quickly was the
console segment (most simply understood as: PlayStation, Xbox and Nintendo).
Currently, its value is close to USD 50 billion, achieving a CAGR of 9.7%.
Here, the key elements enabling such an increase are: exclusive titles issued
only on one device (PlayStation is the most powerful here), and hardware
stability - buying one device allows you to play in a wide portfolio of games
without any problems, unlike PC, where the hardware requirements are constantly
growing, somehow forcing players to continuous improvements to the equipment
(here indirectly there are hardware deficiencies related to, for example, the
use of graphics cards for mining cryptocurrencies[4]).
PC as a gaming platform probably has already had the peak
of its popularity, but it still constitutes a significant part of the market,
in recent years the PC / MMO gaming market has grown on average by 4.1%,
reaching over USD 33 billion.
Browser games have become a "victim" of
the development of mobile games due to the similarities with mobile games, it
has become not very interesting for the casual gamer. In the last five years,
browser games have lost almost half of their revenue, but that's still over $
2.5 billion.
Interestingly, the largest transactions on the
gaming market concerned companies producing AAA games for PC and consoles
(acquisition of Zemi Max, Gearbox or Codemasters) , which together are smaller
than the mobile games market.
A large number of such acquisitions result from
the high tightness of the AAA gaming market. The basic mechanisms limiting such
activity are: high production costs significantly reducing the possibilities of
independent studies in this market segment and difficulties in managing such
projects.
Reason
2: Investor optimism:
The pandemic that began in early
2020 turned a lot of business upside down regardless of the industry or region.
It was no different in the gaming industry, but contrary to a large part of the
economy, this period can be considered particularly successful for the
industry. In contrast to many other economic sectors that are drastically
affected by the pandemic, the video game industry has been more resilient. Most
of the video game developers and publishers were able to work normally in
remote mode, keeping the development of projects. Thanks to this, the
production process (or, if you prefer, the creative one) was not as strongly
disrupted as in the traditional segments of the economy. Some
problems have arisen with the supply of gaming equipment due to the breaks in
the supply chains[5].
The lockdown introduced in most
countries of the world in spring 2020 caused the world to slow down and people
often had more free time and more worries[6].
People also lost most of their entertainments and spent more time online. A
chart from a Deloitte study allows you to estimate the scale of the increase in
such activity.
Picture
1. Gaming in lockdown
Source:
Deloitte, Will gaming keep growing when the lockdowns end?
The users interest in the gaming
market has been noticed by investors. A measure that illustrates the increase
in sentiment towards the gaming sector is the increase in the MVIS Global Video
Gaming & eSports Index that accumulates the results of the largest entities
in the Gamedev sector. The MVIS Global Video Gaming & eSports index, which
gathers the results of the largest entities from the Gamedev sector, may be a
measure illustrating the increase in sentiment towards the gaming sector. The MVIS Global Video Gaming & eSports Index (MVESPO)
tracks the performance of the largest and more liquid companies in the global
video game and eSports industries. It is a modified market cap weighted index
and only covers companies that generate at least 50% of their video game and /
or eSports revenue such as video game development and related software /
hardware, streaming services and eSports event companies. MVESPO covers at
least 90% of the universe in which to invest[7].
Figure 1. MVIS Global Video Gaming
& eSports Index
Source: https://www.mvis-indices.com/indices/sector/mvis-global-video-gaming-esports
Another argument showing in favor of investors' optimism is the number of completed public offerings. In 2020 and by the end of November 2021, 61 public offerings for companies from the gamedev sector were completed, , an increase of almost half the increase compared to 2018, when only 43 public offerings were carried out. An interesting fact is that a significant number of offers were made on the WSE. The Warsaw Stock Exchange has become home to the largest number of game developers.
Chart 2. Public offer in game sector
Source: Internet
Reason
3: Situation
of the biggest players on the market
As I showed before, the gaming market has grown by
75% in the last 5 years and will double in the next two years. The table below
shows the EUR-converted revenues of the largest companies in the industry. To
avoid problems, the following analysis does not include entities with highly
diversified activities that have significant acquisitions(e.g. Microsoft, which
took over ZeniMax in 2020 and Mojang AB in 2014, and the Chinese technology
holding Tencent).
Table 3. Top 10 Revenue (mln
USD)
|
Company |
Country |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
LTM 1H 2021 |
|
Activision Blizzard.
Inc. |
USA |
4 768.4 |
6 930.3 |
6 599.6 |
7 738.3 |
6 475.2 |
7 548.0 |
8 992.8 |
|
Nintendo Co.. Ltd. |
Japan |
4 377.4 |
4 541.7 |
9 111.8 |
11 404.0 |
12 392.4 |
15 471.9 |
15 625.1 |
|
Electronic Arts.
Inc. |
USA |
4 286.0 |
5 016.3 |
4 720.9 |
5 210.3 |
5 642.5 |
5 476.2 |
5 756.1 |
|
Krafton Inc. |
South Korea |
40.3 |
32.4 |
273.2 |
1 038.0 |
940.0 |
1 432.8 |
1 471.3 |
|
Take-Two Interactive Software Inc. |
USA |
1 378.3 |
1 842.7 |
1 643.5 |
2 808.6 |
3 147.9 |
3 281.2 |
3 375.3 |
|
Nexon Co.. Ltd. |
Japan |
1 618.3 |
1 645.1 |
1 961.6 |
2 386.1 |
2 282.1 |
2 650.2 |
2 630.3 |
|
Playtika Holding
Corp. |
Israel |
0.0 |
0.0 |
1 082.4 |
1 538.1 |
1 883.6 |
2 213.7 |
2 500.2 |
|
Ncsoft Corporation |
South Korea |
728.3 |
856.8 |
1 548.4 |
1 589.6 |
1 470.5 |
2 072.5 |
1 955.7 |
|
Embracer Group AB |
Sweden |
25.8 |
39.1 |
67.4 |
628.6 |
615.7 |
1 150.6 |
1 399.0 |
|
Zynga Inc. |
USA |
781.8 |
777.5 |
810.2 |
936.0 |
1 318.9 |
1 843.4 |
2 535.1 |
|
Total |
- |
18 004.6 |
21 681.9 |
27 819.0 |
35 277.5 |
36 168.8 |
43 140.7 |
46 240.8 |
Source: Financial statements
The revenues of the 10 largest entities jumped
from $ 18 billion to over $ 46 billion in the analyzed period, which means a
2.5-fold increase and a CAGR of 18.7%, much faster than the entire market
(12%). It can be concluded that a relatively small number of entities subjugate
the market and, paradoxically, small studios have even more difficult
conditions to compete with giants. This is shown even better by the chart of
the top 10 share in the total market. Some of these entities are developing very
dynamically and one of them (Embracer) will be described in the context of a
certain strategy that appears in the M&A area on the gaming market.
Chart 3. Top 10 share
Within five years, the largest listed companies
operating in the gaming industry gained over 5% share in the gaming market
worth over USD 170 billion. It should also be remembered that two strong
entities operating on the gaming market are not included in the list, if you
add them, you can safely say that these 12 entities control 1/3 of the computer
games market.
The increase in the scale of operations also had a
significant impact on the profitability of the business. The table below shows
the EBITDA (operating profit plus depreciation) of the largest companies in
2015 - LTM 1H 2021.
Table 4. Top 10 Reported EBITDA (mln
USD)
|
Company |
Country |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
LTM 1H 2021 |
|
Activision
Blizzard. Inc. |
USA |
1 450.7 |
2 399.6 |
2 080.5 |
2 586.6 |
2 067.7 |
2 823.7 |
3 407.8 |
|
Nintendo Co.. Ltd. |
Japan |
364.7 |
350.3 |
1 610.8 |
2 462.7 |
3 427.7 |
5 730.2 |
5 682.3 |
|
Electronic Arts.
Inc. |
USA |
1 048.1 |
1 456.7 |
1 437.3 |
1 212.5 |
1 628.5 |
1 200.5 |
1 184.2 |
|
Krafton Inc. |
South Korea |
11.4 |
-1.8 |
25.5 |
283.4 |
342.9 |
701.2 |
637.2 |
|
Take-Two Interactive Software Inc. |
USA |
109.3 |
154.2 |
200.2 |
287.1 |
503.4 |
738.7 |
855.5 |
|
Nexon Co.. Ltd. |
Japan |
688.7 |
682.0 |
906.1 |
1 067.1 |
1 035.6 |
1 173.7 |
1 093.6 |
|
Playtika Holding
Corp. |
Israel |
0.0 |
0.0 |
351.4 |
490.4 |
592.7 |
515.8 |
760.7 |
|
Ncsoft Corporation |
South Korea |
236.7 |
314.8 |
541.4 |
593.4 |
456.6 |
761.7 |
553.9 |
|
Embracer Group AB |
Sweden |
9.0 |
11.6 |
23.3 |
90.6 |
105.9 |
308.4 |
411.8 |
|
Zynga Inc. |
USA |
-50.3 |
-62.1 |
52.7 |
56.1 |
-0.9 |
129.1 |
536.1 |
|
Total |
- |
3 868.3 |
5 305.3 |
7 229.2 |
9 129.9 |
10 160.0 |
14 083.1 |
15 123.0 |
Source: Financial statements
According to the accumulated data on EBITDA from
the table, EBITDA in the analyzed period increased from USD 3.9 billion to USD
15.1 billion, which means a nearly four-fold increase in profit - much more
than in the case of revenues. The CAGR EBITDA in the period considered was
24.1%.
The very good financial performance
of the gaming industry has created significant cash reserves that have recently
been used to finance acquisitions - most of these acquisitions in Table 1. were funded through equity rather than debt
financing. The entities also have no problems with obtaining capital for
acquisitions from investors[8].
Table 5. Top 10 Cash (mln USD)
|
|
Cash |
Assets |
Cash/Assets |
|
2015 |
11 417.6 |
39 705.0 |
28.8% |
|
2016 |
14 143.6 |
46 451.3 |
30.4% |
|
2017 |
15 450.3 |
47 563.0 |
32.5% |
|
2018 |
18 261.2 |
52 533.6 |
34.8% |
|
2019 |
18 337.1 |
63 454.8 |
28.9% |
|
2020 |
25 520.8 |
75 198.2 |
33.9% |
|
LTM 1H 2021 |
25 841.6 |
77 669.3 |
33.3% |
Source: Financial statements
The case of the
Codemasters takeover at the turn of 2020 and 2021 proves how stiff competition
is regarding the acquired enterprises. Two giants of the industry competed for
the acquisition of Codemasters a listed producer of games. especially driving
simulators. Take-Two and Electronic Arts. Take-Two offered to acquire
Codemasters in November 2020 for approximately US$994 million and Codemasters
subsequently accepted the deal. However. in December 2020. Electronic Arts
placed a rival offer of $1.2 billion. 14% higher than Take-Two's bid. which
Codemasters' board of directors agreed to instead. Take-Two formally withdrew
its offer in January 2021. Electronics Arts fully acquired Codemasters on
February 21. 2021[9].
Case: Embracer acquisition policy
Most of the entities on the list of the largest
consider acquisitions as a kind of supplement to the offer and the acquisition
of interesting brands and skills built in the acquired organizations. However,
one of them, the Swedish Embracer, focused on building a kind of gaming empire
on takeovers. So far, their ideas are optimistic about investors. The scale of
growth of the embracer business is best illustrated in the chart below
Chart 4. Embracer financial results
Source:
Embracer’s financial statements
Embracer Group AB (formerly Nordic Games
Publishing AB and THQ Nordic AB) is a Swedish video game holding company based
in Karlstad. The company was established under the name Nordic Games in
December 2008, forming the video game publishing subsidiary of game retailer
Game Outlet Europe. In August 2016, Nordic Games, together with its Viennese
office, was renamed THQ Nordic, using the "THQ" trademark that it had
acquired in 2014, and in November 2016, the company became a public company
listed on Nasdaq First North[10].
The key past situations of the company are presented below.
Table 6. Embracer's timeline
|
Dates |
Description |
|
December 2008 |
Establishment of Nordic Games, a game publisher
by Lars Wingefors and Pelle Lundborg |
|
2011 |
Establishment of Nordic Games GmbH in Vienna, to
which the publishing activity has been transferred |
|
June 2011 |
Nordic Games Holding acquired the assets of
insolvent publisher JoWooD Entertainment and its subsidiaries |
|
April 2013 |
Acquisition many assets of bankrupt publisher
THQ |
|
2014 |
acquisition of the THQ trademark |
|
August 2016 |
Nordic Games, together with its Viennese office,
was renamed THQ Nordic, using the "THQ" trademark |
|
22 November 2016 |
company became a public company listed on Nasdaq
First North, being valuated at 1.9 billion kr (approx. 200 mln USD), while
Wingefors retained a 50% ownership in the company. which in turn owned and
operated the Deep Silver video game label, for €121 million. |
|
February 2018 |
THQ Nordic acquired Koch Media Holding |
|
June 2018 |
The company issued 7.7 million new Class B
shares to raise $168 million, which would be used for future acquisitions |
|
November 2018 |
Acquisition Swedish game developer’s Coffee
Stain Studios and affiliated companies, for 317 million kr. (30 mln USD) in
cash consideration. Through the two acquisitions and continued sales from THQ
Nordic GmbH, THQ Nordic's net sales rose by 713%, to US$447.6 million, in the
2018 fiscal year. |
|
February 2019 |
THQ Nordic issued 11 million new Class B shares,
raising 2.09 billion kr. ($225 million |
|
August 2019 |
Acquisition investment company Goodbye Kansas
Game Invest (GKGI) for 42.4 million kr. GKGI held minority investments in
five game startup developers |
|
17 September 2019 |
Change of name to Embracer Group |
|
December 2019 |
The company, through GKGI, acquired Swedish
developer Tarsier Studios for 99 million kr. |
|
February 2020 |
Embracer acquired Saber Interactive and its five
internal studios for a total of US$525 million, making Saber the fifth direct
subsidiary of Embracer |
|
April 2020 |
Embracer raised $164 million in April 2020, to
be used for future expansion |
|
August 2020 |
Embracer Group announced seven acquisitions |
|
November
2020 |
Embracer Group announced twelve acquisitions |
|
February 2021 |
-
Embracer Group announced three major acquisitions: Gearbox Software (1.3 bln
USD), Easybrain (640 mln USD) and Aspyr Media (450 mln USD). |
|
March 2021 |
Raise
another $890 million for strengthening its finances and continue its
acquisition strategies. |
|
August 2021 |
Embracer
acquired several more companies |
Source:
Internet, Embracer’s ESPI and EBI
Nowadays Embracer Group has eight operative groups
as its direct subsidiaries: Amplifier Game Invest, Coffee Stain Holding, DECA
Games, Easybrain, Gearbox Entertainment, Koch Media, Saber Interactive and THQ
Nordic. Each group has its own operations, subsidiaries and development
studios.
The easiest
way to show investors' sentiments towards Embracer is to use the stock chart.
Chart 5. Embracer's quotation
Source:
www.investing.com
Investors accepted the management's ideas very
well. From November 2016 to May 2021, the company's shares increased from 5 SEK
to over 130. Such dynamic development of the shares was not prevented even by
active fundraising for acquisitions - from the start of quotations, the company
collected over EUR 1.5 billion from the market.
Conclusion:
Computer games have become an immanent part of entertainment, gaining more and more new users every year. The half-century development of the market allowed for the emergence of top players on the market, gathering a large part of the market. Along with the development of the market and the emergence of huge amounts of money from players in companies, this directly encourages acquisition activities, what is more, this market is not heavily penetrated by investment funds and the majority of acquisitions are industry-specific. In my opinion, this is due to the specifics of the industry, where a single company or a branch of several hundred employees has been working on a single product for several years without any certainty as to its effectiveness (it resembles the pharmaceutical industry a bit, but here, in addition to good quality, you should shoot at the tastes of users ). In line with this understanding of the problem, building a broad portfolio of developers allows for minimizing the risk specific to individual projects. The example of Embracer shows that such a strategy is applauded by investors who entrust their capital in subsequent financing rounds.
[1]https://web.archive.org/web/20000815071957/http://www.us.infogrames.com/corporate/investor_relations/gtis/121799_gtdealclosure.asp [accessed
on November 5, 2021].
[3] The
DLC and micropayments themselves also have an interesting history. The first
modern micropayment in games for many is the horse armor from the Shivering
Isles expansion for TES IV Oblivion, but similar solutions appeared in Diablo
and Baldur’s Gate 2, the difference was in the way they were purchased.
[5] Coronavirus:
Nintendo Likely to Suffer Global Switch Shortages - Bloomberg Atari VCS
console delayed, report blames Coronavirus outbreak (blastingnews.com)
[8] For
example, Embracer described later
[9] https://www.videogameschronicle.com/news/ea-has-officially-completed-its-purchase-of-codemasters/
[10] The
Polish CD Projekt followed a similar path from the publisher to the creator,
only in this case the development was organic
