Take-Two’s second coming 

Contact: Scott Denne

After nearly a decade on the sidelines, Take-Two Interactive has returned to the M&A game. Back then, the birth of the smartphone and explosion of low-cost mobile gaming loomed over developers of pricey console games. But now that the shift to digital is delivering expansion, not irrelevance, Take-Two and its peers are printing more acquisitions that align with that trend.

Take-Two’s latest move, the pickup of space simulation game Kerbal Space Program from developer Squad, marks its second purchase of the year, following its $250m reach for Social Point in February. Prior to those deals, Take-Two hadn’t bought anything since early 2008. Both recent transactions have brought on digital assets – Kerbal sells through PC downloads, while Social Point makes mobile games. (Unlike Social Point, Kerbal’s price tag wasn’t disclosed, suggesting it was the smaller of the two deals.) And they follow a 52% jump in Take-Two’s annual revenue to $572m and 55% increase in bookings from digital sales.

Other companies with a history of making games for the PlayStation and other consoles have adjusted their M&A strategies. Ubisoft, also experiencing growth amid greater digital revenue, has printed two gaming purchases this year as well, putting it on pace for its most acquisitive year since 2013. Warner Brothers Entertainment also ended a drought of its own – almost seven years since its last videogame acquisition – when it bought mobile developer Playdemic in February.

Greater digital sales provide gaming vendors with more predictability in sales, lower costs of revenue and a buffer against seasonality, in addition to revenue growth. Market disruptions, such as shifting sales channels and business models, are most often associated with opportunities for startups. But the experience of Take-Two and its rivals shows that startups aren’t the only companies that can win that game.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Mobvista sees path to a broader gaming platform with GameAnalytics in the fold

Contact: Scott Denne

Mobvista makes its second international deal of the year with the acquisition of mobile behavioral analytics vendor GameAnalytics. Fueled by its recent listing on China’s NEEQ exchange, an over-the-counter board for Chinese startups, Mobvista is expanding from its roots as a mobile ad network into a broader platform for gaming monetization. Its previous transaction, the $25m purchase of NativeX, brought it reach into the US market as well as video advertising and other rich media formats.

Today’s pickup of Copenhagen-based GameAnalytics gets it software that provides game developers with audience behavioral and segmentation data that can be deployed for marketing campaigns or product development. The move mirrors Tapjoy’s (much earlier) transformation from a mobile ad network into a gaming monetization platform with its reach for South Korea’s 5Rocks two years ago. Other competitors selling a broad platform for game developers include Chartboost and Unity Technologies, a game engine developer that announced a $181m funding round earlier this week.

Mobvista is one of an expanding number of China-based businesses using M&A to grab a bigger share of the mobile app ecosystem. So far this year, Chinese companies have acquired 10 mobile assets for a total of $9.2bn – both numbers are higher than the total at the same point in any other year, according to 451 Research’s M&A KnowledgeBase. This year’s deal value total, bolstered by Tencent’s $8.6bn acquisition of Supercell, is already double that of any other previous year. Mobile apps are a large and high-growth market in China. According to 451 Research’s Mobile Marketing and Commerce Forecast, mobile advertising revenue in China will increase 86% this year to $11.6bn and account for more than one-quarter of the global market.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Strategy games

Contact: Scott Denne

Mobile game developers are playing with different M&A strategies. So far, none are winning. Mobile gaming is a high-growth but hits-driven business, making it tough for one company to grab and maintain market share. That doesn’t mean they’re not trying.

King Digital Entertainment, maker of the ‘Candy Crush’ series, thinks it can predict where lightning will strike. The company is making its second purchase post-IPO with its $45m reach for Z2. In acknowledgement of the uncertainties of this particular market, there’s also a $105m earnout attached to the deal. That’s similar to King’s pickup of game studio Nonstop Games last year – $16m upfront with an $84m earnout.

Zynga has taken a different approach that has yet to pay dividends. The company has bought businesses that have already produced a hit. It has, we hope, learned that predicting what will be a hit is as difficult as predicting how long a hit will last. Zynga’s M&A strategy is more expensive than King’s in that it pays more upfront, with a small or no earnout. The company spent $180m in 2012 to buy OMGPOP right at the zenith of its ‘Words with Friends’ game. Last year, it snagged NaturalMotion for $487m. In addition to a game studio, that transaction got it some unique technology to apply across its portfolio, but it hasn’t been enough to slow its fall. Despite the addition of NaturalMotion’s revenue to 11 months of last year’s top line, Zynga’s sales dropped 21% to $690m in 2014.

Glu Mobile is among the few employing a winning strategy. The company has been scooping up inexpensive, well-known brands that it can revamp for mobile games. This has led to a portfolio of modest hits. Nothing that would move the needle for Zynga or King. Even with Glu’s success (revenue doubled year over year in the most recent quarter), Wall Street values the company at 2x trailing revenue (slightly below Zynga’s multiple and just above King’s).

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Gaming has Amazon Twitch-ing

Contact: Scott Denne

Amazon reaches for Twitch, a website for watching and broadcasting videogame play, in a $970m deal that could benefit multiple parts of the Amazon empire. In picking up Twitch, Amazon could boost its Prime offering with original content while helping many other parts of the company, from its core retail sales to its advertising business and, of course, its gaming foray.

While Amazon Prime, its subscription media business, lags Netflix, it’s gaining ground fast. According to a June survey by ChangeWave Research, a service of 451 Research, 42% of subscribers to an alternative TV service chose Amazon, up from 33% a year earlier, and only half what Netflix garnered. That same survey also showed the impact of original content on those numbers – 20% of Netflix subscribers said they mostly use the service for original content, compared with just 4% for Amazon. To be clear, Amazon hasn’t indicated how or whether Twitch will be integrated with Prime, but it just bought itself billions of hours of unique content.

Twitch, with a substantial audience overseas, also provides an opportunity to grow Amazon’s media business beyond North America via sales of premium features such as ad-free viewing and larger uploads. Through the first half of 2014, Amazon’s international media revenue – the slowest portion of its business – grew just 5%, or about one-third the rate that unit grew in North America.

Owning Twitch also gives Amazon a fertile ground for entering the gaming market itself – an Amazon console has long been rumored and the company recently acquired game studio Double Helix Games. It also expands Amazon’s reach into a desirable demographic – young men – that it can sell to directly and leverage for its advertising business.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Is Backflip next for Nexon?

Contact: Ben Kolada

If the rumors are true, Japanese gaming giant Nexon will have spent nearly $1bn on gaming acquisitions in just one month. We’re hearing the company has acquired three-year-old gaming startup Backflip Studios for about $385m, and that’s not including a significant earnout. That would be on top of the $470m it dropped on fellow Japanese gaming company gloops at the start of the month.

Rumors of Nexon acquiring Backflip Studios first started circulating in September. We were recently told that Nexon is shelling out $385m, excluding a significant earnout, for Backflip. The Boulder, Colorado-based startup had grown considerably on its own. Published reports claim its revenue grew 200% in 2011, with 350% growth projected for this year. According to our sources, Backflip is set to generate roughly $40m in EBITDA this year.

The sale – provided it comes – would give a rather rich return to the entrepreneurs running Backflip, which has taken very little funding. In a lone SEC filing, Backflip disclosed it had secured just $140,000 in equity financing, but did not state who its investors were. Nexon may well provide more detail about the rumored transaction on or before its next earnings call, scheduled for November 8.

IGT rolls dice on Facebook gaming, but hedges bet

Contact: Brian Satterfield

In yet another sign of the power of social networking, casino gaming systems maker IGT agreed on Thursday to purchase Facebook casino videogame startup Double Down Interactive for a potential consideration of up to $500m. The Double Down deal highlights the growing importance of social networking websites to traditional gaming companies, as Double Down enables IGT to reach millions more players online in a single day than the company could ever hope to in the smoke-filled parlors of Las Vegas or Atlantic City. But in a nod to the risk associated with entering a new market, IGT has hedged its bet by structuring the deal to include a $165m earnout (as well as $85m in retention incentives), which is equal to two-thirds of Double Down’s $250m price tag.

The transaction is one of the largest in the social gaming industry, and follows half a year after Electronic Arts made a similar move in buying PopCap Games for $750m (that acquisition also included a substantial earnout payment of up to $550m, or nearly three-quarters of PopCap’s deal value). Founded in 2009, Seattle-based Double Down’s large user base and rapid growth could help to explain why the company commanded such a large valuation for its sector. In November 2011 alone, its games received 54 million visitors, of which 1.2 million returned to play on a daily basis. Double Down also has a healthy base of what it calls monthly ‘active users,’ which the company said rocketed 30% from 3.3 million in October 2011 to 4.7 million at the time of acquisition.

EA gets serious about casual gaming

Contact: Brian Satterfield

In an expensive nod to the ever-increasing importance of online social media and mobile gaming, Electronic Arts has reached deep into its pockets to purchase Seattle-based PopCap Games for $750m. The transaction, which could end up costing EA as much as $1.3bn if the full earnout is hit, stands out as not only the priciest acquisition in EA’s history, but also the largest-ever deal in the online videogame sector.

This isn’t the first time that EA, best known for its console titles, has had to pay big to bring its gaming portfolio up to date. In 2005, the company entered the mobile sector with the $680m acquisition of Jamdat Mobile, then took out social gaming vendor Playfish for $300m in late 2009. However, the diversification has been slow. Sales of console-based games still accounted for 70% of EA’s total revenue in the just completed fiscal year. Overall revenue at the company was flat and EA guided for only slight growth in the current fiscal year.

In contrast, sales at social gaming upstart Zynga more than quadrupled last year. It’s all but certain that when Zynga, which filed its IPO paperwork earlier this month, hits the market, it will be valued higher than EA’s current market cap of just less than $8bn.

With the acquisition of PopCap games, EA now boasts six of 2010’s top 10 revenue-grossing iOS games and roughly 10 million daily average players on Facebook. But EA still has a long way to go if it hopes to grab a larger slice of Zynga’s daily average user base on Facebook, which currently numbers about 53 million.

In mobile gaming, a company is only as valuable as its users

Contact: Ben Kolada

A pair of mobile gaming acquisitions in the past half-year has proven that an ability to monetize an audience is just as important as the audience itself. In the latest deal, GREE is paying $104m in cash for OpenFeint. While that’s certainly a handsome payout for the startup’s investors, it’s a considerably lower price-per-user valuation than competitor ngmoco caught from DeNA in October. From our perspective, the disparity in valuations seems primarily due to each firms’ ability to generate revenue from their audiences.

At a macro-level view, OpenFeint and ngmoco should theoretically garner similar valuations. Both companies are mobile gaming startups founded in 2008, based in the Bay Area and backed by blue-chip investors. For the most part, they seem to have shared the same recipe for success.

However, their per-user valuations are markedly different because of their abilities to monetize their audience. OpenFeint managed to attract some 75 million users, but was only able to turn that into $283,000 in net sales in its last fiscal year. Meanwhile, ngmoco touted just 50 million downloads before its sale to DeNA, but managed to generate just over $3m in revenue in its calendar year before its acquisition and was reported to be on a $30m revenue run-rate. That led to a roughly $6 price-per-downloaded-user valuation for ngmoco – more than four times the per-user valuation OpenFeint received from GREE.

EA flies into mobile

Contact: Jarrett Streebin

Electronic Arts (EA) recently shelled out a reported $20m for mobile game publisher Chillingo. The UK-based startup published the popular iPhone game Angry Birds. Although the acquisition didn’t include the game or its developers, it will help EA market and distribute its mobile games. This small deal is the latest in a hot streak in mobile entertainment transactions this past year.

Last year, EA bought mobile and social game developer Playfish for $300m, plus an additional earnout of up to $100m, making EA one of the largest developers for mobile and social games. The company followed that up with the purchase of mobile game developer IronMonkey Studios earlier this year. The Australian company had already built mobile games for existing EA titles such as Medal of Honor and Need for Speed. Now, Chillingo will provide the channels to better market and distribute these and future titles to iPhone as well as handheld consoles such as Sony’s PSP Mini and Nintendo’s DSiWare and WiiWare platforms. It’s likely that this distribution will extend to Android titles as well.

Not that EA is alone doing deals for mobile gaming companies. In mid-October, DeNA dropped a whopping $400m on ngmoco, one of the largest acquisitions ever involving the iPhone. These are just a few of the transactions that have helped double the M&A activity in the mobile gaming sector. So far this year, there have been 29 deals, up from 17 last year, according to The 451 M&A KnowledgeBase.

Zynga buys beyond Facebook

Contact: Jarrett Streebin

Zynga has become a serious collector of small to medium-sized game development studios, acquiring seven companies so far this year. Beyond just buying more titles, the company has used M&A to get into other markets. For instance, Zynga has expanded internationally with XPD Media in China, Dextrose in Germany and Unoh in Japan. With the latest purchase of Bonfire Studios, which was announced October 5, it goes beyond Facebook gaming altogether into console and PC gaming.

Founded in 2007, Zynga has grown from a small social games developer into the largest shop on the block. The San Francisco-based firm is the leading developer of Facebook games and makes its money by selling virtual goods in its games. (We looked more fully at the market for virtual goods in a recent Sector IQ.) Users can pay real cash to buy weapons for their mafia or crops for their farms. Things were going well until Facebook unveiled Facebook Credits earlier this year. There was even a standoff between Zynga and Facebook due to the 30% cut that Facebook takes. Eventually, Zynga gave in and signed an exclusivity agreement.

Still, we sense that the company learned a valuable lesson about being overly dependent on a platform that it doesn’t own. At least that’s how we might read the fact that six of Zynga’s past seven deals are in other areas of gaming. The diversification has seen Zynga broaden its international business with the acquisitions of Chinese firm XPD Media, German game engine developer Dextrose and Japanese social gaming company Unoh. And most recently, Zynga’s reach for Bonfire Studios added a startup that was founded by three gaming veterans with PC and console experience.