2020 does not need an introduction. While it was a horror show for many people all over the world. The world stood still and suddenly there were no more concerts, no more movies in the theater, no Broadway, no live performances at all … instead we were hidden in our homes to keep our families and our communities as safe as possible.
Gaming was the big connector in 2020 and the market agreed. During the “Mergers and Acquisitions: Behind the Deal During a Pandemic” panel for GamesBeats Driving Game Growth & Into the Metaverse in partnership with Facebook, a number of business development and private investment experts pondered like M&A 2020, Pandemic and everything looked.
Nate Morgan, the global gaming director of the Facebook Audience Network, moderated a conversation with Kris Davis, VP of Business Development at Kabam. Rob Ricca, VP of Business Development at Scopely; and Nick Tuosto from LionTree.
Setting the stage for the panel, Morgan stated, “2020 has been a tremendous year for M&A games. Pitchbook tracked over 1,500 transactions for a total of $ 43 billion in business value within entertainment software. “
In the spotlight
Amid a global pandemic, gaming was the entertainment industry favorite.
“During the global pandemic, it was unclear what the macro picture looks like [of gaming] would look like this, ”Tuosto said when asked to paint a picture of the games industry in the early days of the pandemic. “There was great uncertainty as to whether or not business could be done remotely. It was such a big part of the M&A equation, understanding the team’s motivation, forging a relationship, understanding how studios are built, the culture … very unclear to begin with if there would be buyers’ beliefs that would suffice to keep the engine running. Indeed, it was far exaggerated in terms of buyers’ appetites, and sellers were also highly motivated. “
According to Tuosto, social connection was what audiences really craved for in 2020. We were separated from our friends and family, but gaming – whether between us, Animal Crossing, Call of Duty or Scrabble Go – brought us back together. Hence, both buyers and sellers had good confidence in the market.
“… you saw multiples really moving in the right direction,” Tuosto continued. “As buyers, you have been rewarded for buying other companies. For example, if you look at Zynga, her performance over the past three and a half years, it has been largely driven by M&A. Zynga, as a public company since early 2017, is almost on the rise [fourfold]. As a public stock, it has done tremendously well through aggressive M&A performance. “
Ricca agreed, and went on to say that it looks like many investors, especially those who have ignored gambling in the past, “have woken up to,“ Oh, wow, there’s a lot more here than we thought. “
Investors in the games industry have always been skeptical. Those who have never really worked with a studio or platform before don’t know what to expect and there will be a lot of manual labor and risk averse micromanaging before they pass the investment on altogether. That’s not a universal truth, of course, and thanks to 2020, the gambling sector is looking better and better for even the most shy of investors.
2020 has effectively leveled the playing field for investors, including those who don’t understand how to gamble. This was partly because the gaming of people who stayed at home was enjoying such a boom and partly because companies that engaged in responsible M&A have created value.
According to Davis, Kabam’s approach to M&A in 2020 (and beyond) will focus on people, not necessarily projects.
“First and foremost, in Kabam, we’re looking for great game makers who are passionate about and passionate about the things they are working on,” noted Davis. “We’re also looking for excellence in design, art, production and the ability to develop new intellectual property. We’re also looking for games with comprehensive RPG, social, and monetization mechanisms that offer the opportunity to grow for many years after launch. And finally regarding the fusion piece, [we think about] shared company values, building different teams, and we’re really looking for people to build a collaborative and innovative culture. “
Ricca’s approach at Scopely is more focused on nurturing partnerships on a full-time basis, as Zynga has done with many mergers and acquisitions over the past five years.
“It really started on [business development] Side because Scopely was really more of a tech game, building up all the publishing infrastructure and then going out and finding great studios to work with and bring them to this platform, ”said Ricca. “And now that we’ve really perfected this model, we’ve started acquiring studios that we’ve worked with or had business development relationships with over the years. Our main focus is to find great game makers, great games that we can somehow get on this platform. “
IPOs are another big part of 2020-2021 history, with Unity, Roblox and Playtika leading the indictments.
“There has been tremendous value added by executing M&A opportunities,” noted Tuosto. “Companies like Zynga have proven they can make five acquisitions in three years, and there are likely to be more. That means, whether organic or inorganic, there is only one other sustainability of growth today, and this perception is beginning to manifest itself very clearly in various multiples. If we look at how a company like Playtika does – Playtika went public last week – [and] is trading at 15 times its earnings estimate for 2022. “
Mergers and Monetization
Tuosto took a look back at our position in 2010 to better understand where we are going. He reminded us that “even the largest triple-As in gaming – Electronic Arts and Activision – haven’t traded too much in terms of the numerous investors attributed to their anticipated sales and profits.”
We all know why: gaming is hit-driven and associated with high risk.
Where we are today is shifting to games like Ultimate Team and Call of Duty with its free blackout mode largely due to monetization.
“As a result, you’ve seen EA trading increase dramatically in terms of expectations of quality and credit for growth, which is reflected in the multiple that EA trades in,” said Tuosto.
Mobile is a different story for IPOs as there is a lot more competition for these market and player segments.
“It’s a much chewable exercise when you think about the most casual mobile experiences,” Tuosto continued. “A game like Helix Jump may catch someone’s attention for a short time, but the average gamer is quick to capitalize on those experiences. And the companies that went public with mobile expertise and great success (like Candy Crush for King) had significant pessimism about their trading. So King was actually only trading two and a half times his expected profit. This is roughly the lowest multiple you can find in an entertainment capacity. Period.”
The reason we’ve seen the problems with investors understanding gaming as a whole is because it’s a completely backward approach to monetization. Tuosto cited users on YouTube and Snapchat as an example. They don’t expect a “free ride”.
“All digital entertainment involves some kind of exchange of value for the entertainment received … except for games,” continued Tuosto. “The market has developed backwards. It started with a premium purchase of a game like Angry Birds and has grown into a heavily in-app purchase dominated game. But today, only a small fraction of the gaming population is paying off. “
Looking ahead, as developers and publishers continue to grapple with long-term monetization strategies for an audience that typically won’t pay, panelists have weighed what to expect from 2021.
Ricca expects “scope, diversity and persistence” of business development and investments in the games industry in 2021.
“I think M&A is helping to drive a lot of that,” said Ricca. “It’s a consolidating industry, but in 2021 there will be more. I think there will be a big step across platforms. With the pandemic, another focus was on social gaming and the ability to log into a game like Scrabble Go [a Scopely mobile title] and maybe I can’t visit my mom now, but I can play scrabble with her. “
Davis is optimistic about the year he believes will be shared by the developers, “and keen to have a strategic partnership.”
The last thing Tuosto noticed was that investors and sellers should be keeping an eye out for a “relatively new phenomenon” called “SPAC Mergers” for a special-purpose acquisition company where a private company goes public by getting one public shell company is taken over.
“There are all kinds of game companies considering going public through a merger with a Shell company that basically only holds cash,” Tuosto concluded. “It’s an alternative to going public, and it offers more visibility, time to market, and the ability to get a different result. Skillz was great proof of that. You are now trading at 30x sales. This allows you to control the messaging, positioning, and investor base that you end up building with a lot more price transparency. “
M&A in 2020 was a roller coaster ride for buyers and sellers in very different ways. The game business exploded. Investors took note. And the interaction created a landscape that made it easy for investors to pay more attention to what gaming could offer. With the United States (and many other countries) continuing to grapple with COVID-19, 2021 could turn out to be even wilder for M&A in gambling.
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