Boom on video games M&A

 

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

* to end of november

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

Source: Own study

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].

[2] Check: https://melmagazine.com/en-us/story/et-1982-atari-game

[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.

[4] https://www.tomshardware.com/news/gpu-shortages-worsen-cryptocurrency-coin-miners-ethereum

[5] Coronavirus: Nintendo Likely to Suffer Global Switch Shortages - Bloomberg Atari VCS console delayed, report blames Coronavirus outbreak (blastingnews.com)

[6] COVID lockdown causes record drop in CO2 emissions for 2020 - UEA

[7] https://www.mvis-indices.com/indices/sector/mvis-global-video-gaming-esports

[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