Tag: ERTS

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

Gaming for consolidation

-Contact Thomas Rasmussen

Once considered largely recession-proof, the videogame industry continued its breakdown last week. As part of the ongoing fallout, UK-based Eidos Interactive was picked up for a bargain last Thursday on the same day that Chicago-based Midway Games filed for Chapter 11 bankruptcy. Eidos was acquired for $124.4m by Japan’s Square Enix, which, while successful on its home turf, has long desired a larger global presence. We would note that the purchase by Square Enix was the 11th gaming acquisition so far this year – more than twice the number during the same period in both 2008 and 2007. And with falling valuations and desperate investors deep underwater, we have a feeling that we will see more consolidation soon, with large players involved.

One such major acquirer that has not been coy about its M&A intentions is Disney. The entertainment behemoth has been making large inroads in gaming partly through acquisitions, and on a recent conference call addressing its future in gaming, the company said that attractive strategic acquisitions could be in the cards this year. So what might Disney buy? Longtime partner THQ, which has been responsible for the majority of Disney-themed games over the years, is a likely candidate. The Agoura Hills, California-based company has struggled over the past year, watching its market capitalization plunge more than 90% from its 52-week high to just $180m.

But a more interesting – and game-changing – scenario is Disney’s possible pickup of Electronic Arts (EA). The once-soaring company, which used to be an extremely active acquirer itself, could be ripe for the taking. EA’s current market cap is around $5.2bn, down from a 52-week high of $20bn. Disney currently has almost $4bn in cash and a market cap of $33bn. It clearly has the means, and let’s not forget that this is the same company and the same management that spent $7.4bn three years ago to acquire Pixar and cement an overnight leadership in computer animation. We estimate that EA could be had for slightly more than what Disney paid for Steve Jobs’ baby, representing a 50% premium over its current value.

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

Betting on casual gaming

-by Thomas Rasmussen

Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?

The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.

Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.

EA plays hardball

-by Thomas Rasmussen

Electronic Arts (EA) officially walked away from its drawn-out $2bn takeover bid of Take-Two Interactive. The move knocked Take-Two’s shares back to the level they were before EA floated its interest. The stock drop evaporated more than $500m in shareholder value overnight. Take-Two has repeatedly said that EA is not the only company with a strategic interest in them. Given the haircut shareholders just underwent, we think they would be interested in more than cryptic statements at this point. Though Activision-Blizzard, UBISoft, Microsoft, and a few other companies could pull off the acquisition, the fact that none have stepped forward yet is most likely not a good sign for shareholders. Strauss Zelnick and Take-Two management might have overplayed its hand on this one.