‘We’re not even at the final stage yet’: analysts on consolidation

With Sony’s $3.6 billion purchase of Bungie, Take-Two’s $12.7 billion deal for mobile phone giant Zynga, and the massive $68.7 billion acquisition by Microsoft for Activision Blizzard, January saw many consolidations.

These three deals alone total $85 billion, which is the M&A total for all of 2021, which in itself was an industry record.

We reached out to a range of analysts to discuss the implications of all the mergers that took place in January, and they were as shocked as the rest of the industry.

“The carousel keeps spinning, and I think we’re definitely not in the endgame yet,” Kantan Games’ Dr. Serkan Toto tells us.

Toto further explains that when it comes to recent mergers, platform holders such as Sony and Microsoft are targeting the top of the market, while other companies such as Embracer are focusing on small game studios. and medium size. “Which leads to the whole industry being squeezed from both sides,” Toto says.

Ampere Analysis’ Piers Harding-Rolls calls last month’s mergers good for many parties. He tells us this has been positive for investors, independent studios who are happy to exit at strong valuations, and for valuations for game companies who already have content portfolios and talent.

“I think excessive consolidation (and we’re not there yet) is impacting the ability of smaller independent publishers and developers to compete over the long term”

Piers Harding Rolls

“I think excessive consolidation (and we’re not there yet) is impacting the ability of smaller independent publishers and developers to be competitive over the long term,” says Harding-Rolls.

“You could argue that Microsoft’s big acquisitions to bring in lots of studios will reduce its reliance on third-party content, potentially impacting its willingness to pay for games to get into Xbox Game Pass for example” , Harding-Rolls said. “In turn, this could impact the extent of content available to consumers through certain channels and services.”

Wedbush Securities managing director of equity research, Michael Pachter, believes that with the most recent gaming consolidation, prices will only rise.

He further explains that the purchases of Zynga and Activision Blizzard were fairly fair, noting that both were publicly traded companies and that despite premiums paid on the stock price, both were trading above their acquisition prices several months ago.

However, Pachter says the 2020 acquisition of Bethesda was “expensive” given its library of games, even if it made sense for Microsoft to add to its Game Pass offerings.

As for this week’s big deal, Pachter views the Bungie acquisition as exceptionally expensive.

“Bungie is really expensive, with no significant catalog and only two games (Destiny 1 and 2) and their expansion packs,” he says.

“Bungie is really expensive…I would have expected Warner Interactive to go for that amount”

Michael Pacher

“It’s not helping Sony develop PS Now much, and I don’t know if it signals much more than desperation. I would have expected Warner Interactive to go for that amount (big catalog and big studios), now I thinks Warner is worth two to three times more than Bungie.”

Pachter says Sony overpaid for the studio acquisition, so much so that we could see a slowdown in mergers and acquisitions as potential sellers insist on asking higher prices than buyers are willing to pay.

Additionally, he says potential buyers such as Amazon, Google, Apple and Netflix haven’t been one to outbid anyone.

DFC Intelligence owner David Cole believes the recent deal between Sony and Bungie is positive for Bungie, as the company could use the distribution and publishing strength of the PlayStation platform. He also explains that the purchase was good for fans who feared Sony could compete with Microsoft’s acquisitions.

“More generally, industry consolidation can help accelerate the development of new products or new technologies”

Colin Sebastian

Cole notes, however, that recent gaming consolidations are bad for companies trying to enter the space. He describes it as a seller’s market with prices for developers and publishers still rising.

Baird senior analyst Colin Sebastian said every acquisition is different, so it’s hard to gauge who this deal is good or bad for. He further explains that mergers depend on a number of factors such as employee retention, business improvement and organizational efficiency.

“Thus, time will tell if an acquisition goes well. More generally, industry consolidation can help accelerate the development of new products or technologies,” says Sebastian. “For example, if by owning Call of Duty, Microsoft can legitimize its cloud gaming and subscription services, it could mark a significant turning point for Microsoft as well as the industry.”

Regarding Sony’s deal with Bungie, Niko Partners senior analyst Daniel Ahmad said the Destiny maker was given a lot of autonomy.

“Destiny 2 recently became a free-to-play title, which opens the possibility of growth because in Asia”

Daniel Ahmed

“Bungie also sought to become a ‘global multimedia entertainment company’ that could create synergies with PlayStation’s Productions (movies/TV) segment,” Ahmad said.

“This deal gives Bungie the stability to continue developing the Destiny franchise and new IP with the creative freedom to operate as an independent studio and self-publish its titles.”

Ahmad says that with the deal, Sony is benefiting from the experience gained in AAA live service as it expands its first-party studios. He sees market demand for Destiny on other platforms and notes that the title would do well in Asia.

“Destiny 2 recently became a free-to-play title, which opens up the possibility of growth because in Asia, which accounts for over 60% of the global PC and mobile games market, free-to-play is by far the dominant business model.”

As to whether large-scale mergers and acquisitions are happening, Toto says there are targets available.

“Among the big public companies, there is Take-Two or EA in the United States, Ubisoft in Europe and Square Enix, Capcom or Sega in Japan which could be next,” says Toto.

“Among the large public companies, there is Take-Two or EA in the United States, Ubisoft in Europe and Square Enix, Capcom or Sega in Japan which could be next”

Dr. Serkan Toto

Sebastian agrees that there will be more consolidation as he believes smaller studios will be acquired as they will increasingly need access to resources alongside rising development costs. For buyers, he says ongoing purchases will be beneficial as they can increase their offerings while expanding into new markets.

“Beyond that, companies are also feeling pressure to have an interest in emerging technologies and services, such as metaverses, VR/AR, NFT, etc.,” says Sebastian.

“All of this means that higher quality video game developers are in high demand.”

He notes that Amazon, Google, Netflix, and Facebook/Meta have all expressed interest in getting more deeply involved in the gaming space, and they’re not alone.

“Tentent has already made major investments in western companies on the mobile side, but might want to expand their presence. The challenge is that for all these relatively new companies in the space, it’s an expensive/risky investment. It’s difficult to merge creative businesses, a lot of the value is in the core intellectual property.”

Harding-Rolls also expects merger and acquisition activity to continue, but says we may not see deals on the same scale as in January.

“I think the big deals done in recent weeks increase the odds of another major acquisition or merger at some point, as companies re-evaluate their strategies in light of the new competitive landscape,” he said.

“I think pure game publishers will feel strategically exposed to some degree and think about how best to compete with the big tech players and game platform companies.”

Harding-Rolls thinks we could see another buyout of a larger publisher or a merger between them, especially as big tech considers acquisitions and Microsoft’s ambitions for the metaverse concept they seek also.

Sony has already said there are more acquisitions to follow, and Harding-Rolls thinks the purchase of Bungie will live up to the investment we can expect from the platform holder in the future.

Additionally, Harding-Rolls says other potential buyers are unlikely to make the same type of deals.

“Tencent is financially very strong, but being a Chinese company, it will face intense scrutiny for any major deal it seeks to enter into in the West, which puts it at a disadvantage against its non-Chinese competitors,” he said. -he.

“Consolidation leads to more consolidation, so this is just the beginning”

David Cole

“As a result, I think it will remain fairly focused and smaller in its deals. Amazon and Google haven’t shown the appetite to invest very heavily in the games space, but Microsoft’s ambition could spur up for re-evaluation. Meta is a candidate for a major move.”

He continues, “I think that makes companies like Embracer quite smart from a ‘buy low, sell high’ perspective. They entered when the market was a relative bargain.”

Ahmad refers to Niko Partners’ forecast for 2022, one of which was that M&A activity will continue to play a notable role this year and beyond.

“Tech and media companies in particular consider game publishing and development companies to have valuable intellectual property, talent and content,” he tells us. “That leads us not to consider ‘Will there be another acquisition?’ but rather ‘Who’s next?'”

Cole agrees, saying, “Consolidation leads to more consolidation, so this is just the beginning.”

(In the interest of disclosure, Baird requested that it be noted that the company deals with titles from Activision Blizzard, Electronic Arts, Take-Two, Zynga, and other companies in the sector.)

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