Bets on casual games are paying off

-Contact: Thomas Rasmussen, Brenon Daly

Fittingly enough, on the one-year anniversary of our piece predicting continued consolidation of the social and casual gaming space, Electronic Arts announced the industry’s largest acquisition. The Redwood City, California-based videogame giant acquired Playfish on November 9 for $275m, although an earnout could mean that EA will pay as much as $400m over the next two years for the company. We estimate that Playfish, which will be slotted into the EA Interactive division, generated about $50m in trailing sales. Overall M&A continues to be strong in the still-niche gaming sector, with deal volume up about 25% from last year with about 35 transactions inked so far in 2009.

With the gaming industry seemingly in recovery mode after not-so-horrible earnings announcements from industry bellwethers EA and Activision Blizzard, we’re confident that more videogame and media companies will look to add social networking games. (After all, the big gaming players have used M&A as a way to buy a piece of a fast-growing, emerging market. For instance, EA spent $680m in cash four years ago for Jamdat Mobile to get into wireless gaming.) With Playfish off the board, which other social gaming startups might find themselves targeted by one of the big gaming vendors?

While there are literally hundreds of promising startups, most are too small to be important enough for a big buyer. Nevertheless, there are a few firms that have grown – both organically and inorganically – enough to make them attractive acquisition targets. For instance, Playdom, which develops games primarily for MySpace and Facebook, recently reached for a pair of smaller gaming startups. The company also recently raised $43m. Similarly, Zynga recently raised a funding round ($15m) and has also picked up two small startups this year. Two other names to watch in the emerging social gaming market are Digital Chocolate and Social Gaming Network Inc.

id Software exit signals continued consolidation in gaming

-Contact Thomas Rasmussen

While we have been expecting continued consolidation in the gaming sector for a long time now, we didn’t see this combination coming. Id Software, a staunchly independent, Mesquite, Texas-based shop best known for founder John Carmack and the Doom franchise, sold recently to Rockville, Maryland-based ZeniMax Media. ZeniMax is a relatively small, privately held publisher, having picked up Bethesda Software in 2001. However, the firm has wealthy backers. It raised $300m in 2007 from private equity shop Providence Equity Partners and according to a US Securities and Exchange Commission filing, raised another $105m in debt financing on July 7, which was specifically earmarked for the acquisition of id. Given that ZeniMax undoubtedly wants to retain id’s employees (even giving a seat of the board to id CEO Todd Hollenshead), we suspect ZeniMax also had to tap into its equity to cover the purchase price, which wasn’t revealed.

This deal makes us wonder about the outlook for the remaining independent legacy videogame studios. Specifically, we’re referring to Bellevue, Washington-based Valve Corp and Cary, North Carolina-based Epic Games. Not that we’re suggesting any formal shopping is taking place. But if the id exit shows us anything, it is that in a time when development costs are skyrocketing and financing is harder to come by, it might be wise for studios to join forces with a larger publisher. That’s particularly true as the current economic slump has painfully shown that the videogame industry is not as ‘recession-proof’ as some people had hoped. Shares of Electronic Arts, which serve as a kind of proxy for the entire videogame industry, have been cut in half over the past year, compared to a mere 6% decline in the broader software stock index during the same period.

Videogame-related M&A by the big four, 2006-present

Acquirer Number of acquisitions Total known deal value
Activision Blizzard 10 $5.69bn (includes merger with Vivendi)
Electronic Arts 9 $771m
Microsoft 4 $235m
Sony 6 N/A

Source: The 451 M&A KnowledgeBase

EA’s South Korean embrace

-Contact Thomas Rasmussen

Even as business at home deteriorates sharply for US-based videogame giant Electronic Arts, it has been quietly – but quickly – using acquisitions to build up its presence in South Korea, a country that has some of the highest broadband penetration rates in the world. In the past year EA has gone from a mere sales presence in Korea to a significant developer and marketing operation, adding about 50 employees there. It has done this by two acquisitions in the past six months. In May the company purchased Hands-On Mobile Korea for $30m to shore up its mobile and casual gaming business. And this month it added J2MSoft, a company with some 55 developers, for an estimated $30m.

If the pickup of J2MSoft represented simply an EA land-grab in a relatively small market, the story would end here. But beyond simple geographic expansion, the purchase indicates a strategy to focus on a quickly growing part of the industry: online gaming. The region is known for these offerings. J2MSoft, for instance, has already launched three successful online games in Asia. We recently profiled the growing interest in casual gaming as a viable business. But the shift to online is just as big, if not bigger.

EA certainly wouldn’t have missed the blockbuster success of the online division at rival Activision Blizzard. That company attributed more than 40% of its $649m revenue in the third quarter to this phenomenon. That was driven by its online game World of Warcraft, which single-handedly took in as much money as all of its properties across the four major videogame consoles. In addition, World of Warcraft‘s subscription-based model has generated billions for Vivendi (which owned Blizzard when it merged with Activision) since it launched four years ago. Along with casual gaming companies, we suspect shopping of online gaming companies will continue to dominate gaming M&A well into 2009.

Select shopping of online gaming companies

Date Acquirer Target Deal value
December 9, 2008 Atari [Infogrames Entertainment] Cryptic Studios $27.6m
December 8, 2008 Perfect World Global InterServ China $23m
August 1, 2007 Walt Disney Club Penguin $350m
October 11, 2007 Electronic Arts VG Holding $620m
June 20, 2006 Electronic Arts Mythic Entertainment $76m

Source: The 451 M&A KnowledgeBase