The DeanBeat: Measuring the froth of the game industry
February 5, 2021
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Merger mania has come to games, and a big window is open for public offerings in the stock market. That translates to a historic opportunity for the game industry. We’re seeing a stampede to grab the money, which is available because investors have realized that gaming has gone mainstream as a form of entertainment, and it’s a haven during the pandemic.

More than 30 game-focused venture capital funds are investing money in game startups. Public market investors are pouring money into initial public offerings (IPOs), special purpose acquisition corporations (SPACs), and direct listing offerings (DLOs). Tilting Point is pouring user-acquisition money into games so that smaller companies can become the next generation of big companies with major hits. The whole ecosystem is greased so that game startups can grow up and become huge before we know it.

We saw the big picture come into view at our GamesBeat/Facebook: Driving Game Growth event last week on January 26, followed by our two-day metaverse event. In particular, our panel on mergers and acquisitions in the video embedded above laid out the landscape for buyers and sellers. And now we’re planning to keep studying the trends with another GamesBeat Summit event coming April 28-29.

The feeding frenzy and the chess game

We’ve already come off a big year. Market analyst InvestGame said that deals in games hit a record $33.6 billion across 664 transactions in 2020 when it comes to acquisitions, investments, and public offerings. But 2021 is already off to a faster start.

In the past week alone, we’ve seen tremendous activity involving billions of dollars. Let’s put aside the GameStop frenzy for now. Social casino game maker Playstudios said it would go public via a SPAC merger (which happens faster than an IPO) at a $1.1 billion value. That comes on the heels of Playtika‘s IPO, where it raised $1.9 billion at an $11 billion valuation, and social casino game maker Huuuge‘s announcement of a $150 million IPO in Poland. Skillz also took its skill-based gaming business public via a SPAC.

The overall game industry grew 19% to $174.9 billion in 2020, according to market researcher Newzoo. And the fourth-quarter earnings of Electronic Arts, Activision Blizzard, and Unity show that the growth is continuing as we head into 2021, which should prove to be a challenging year as it will test whether the pandemic boost was temporary or not.

Now let’s consider companies that we’ve never heard of. Moon Active bought Melsoft. The Russian mobile game maker Nexters, which has grown to 425 employees, also announced it would go public via a SPAC at a $1.9 billion value. Embracer also bought Easybrain, a Cyprus-based maker of mobile titles such as, for as much as $640 million. I don’t know how those companies are going to do, but evidently, they’ve been printing cash. That tells you something. Even game companies that don’t have strong brands or worldwide fame can generate profits and raise money in this environment at a time when so many other industries are struggling because of the pandemic.

Some very solid and well-known companies are also raising war chests. Embracer has raised enough money to do 15 acquisitions and mergers in just a few months. The company now has more than 6,000 developers and brands from World War Z to Borderlands under one roof. Roblox‘s direct listing is presumably coming soon, after the company announced it had raised $520 million in a venture round. Unity paved the way with its IPO in October, raising $1.3 billion at a $13.3 billion valuation. Now it is valued at $40 billion.

This Lara Croft-like character is not a glimpse at the next Epic Games title.

Above: This Lara Croft-like character is not a glimpse at the next Epic Games title.

Image Credit: Epic Games

If you think about that, now Unity has access to more capital, as it could easily raise some more from the public at its current valuation, and it could use that capital to gain competitive advantages. Compare that to Epic Games, which last raised $1.78 billion at a $17.3 billion value in August through private investments. Unity is now more valuable than its rival, even though Epic Games is much older, has the high-end Unreal Game Engine, and it owns Fortnite. The latter has produced billions in profits for Epic, while Unity is losing around $80 million a quarter.

The way I see it, Unity may force Epic’s hand. Epic may have to go public, even if it doesn’t want to, to realize its full potential as a company and generate the returns that its investors will want to see. I would fully expect Epic to raise a war chest; otherwise, it leaves money on the table. Here’s the problem. When everyone else is feeding at the trough, it is reasonable to say you’re going to sit things out. That’s safe. But it also means you could miss out on historic gains. If you sat out the internet craze in 1994, you might lose to someone like Amazon.

This is where access to capital in the game industry becomes a kind of chess game. We saw Electronic Arts maneuver ahead of Take-Two Interactive, topping Take-Two’s $973 million offer for Codemasters with a $1.2 billion bid, as EA saw the opportunity to corner the market on racing games. Yet EA is paying a price that is too frothy for Take-Two, as the bid amounts to 25 times Codemaster’s EBITDA (earnings before interest, taxes, depreciation, and amortization) for the current financial year.

The M&A boom

Randy Pitchford is CEO of Gearbox Entertainment.

Above: Randy Pitchford is CEO of Gearbox Entertainment.

Image Credit: Gearbox/Embracer

On the acquisition front, Microsoft kicked off a big frenzy with its proposed $7.5 billion acquisition of Bethesda, whose CEO Robert Altman passed away on Thursday. That deal hasn’t been approved yet. But Embracer Group of Sweden has raised public money to go on an unprecedented acquisition spree. It paid up to $1.3 billion for Gearbox Entertainment, the maker of the Borderlands games. That amounts to 10 times the company’s 2020 revenues in an industry where it was common to see acquisitions at three times revenues. To add to the excitement, Embracer also bought Aspyr for up to $450 million and Easybrain for up to $640 million on the same day.

Sounds crazy, right? But Embracer has raised a lot of money on the stock market, and it structured the deal so that only $188 million is paid in cash, and $175 million is paid upfront in stock. Gearbox will have to earn the rest of the money over six years by hitting financial and operational targets. It’s a big goal, but Gearbox CEO Randy Pitchford said in an interview he has never gone wrong betting on what Gearbox can accomplish. He liked Embracer’s message of allowing its newly acquired companies to execute on their own visions.

And Lars Wingefors, Group CEO of Embracer, has figured out a model for acquisitions where the acquired company’s leaders don’t walk out the door the next day. Pitchford said employees are getting a payday too as they own 30% of the company. The exodus of talent has always been the Achilles heel in any acquisition strategy, and deals can be structured in a way to stop that exodus.

Embracer is an outlier, as it also bought 12 game studios in a day last quarter. But it has company in the form of others like Microsoft, MTG, Tencent, NetEase, Facebook, Zynga, AppLovin, and others. Not to mention the fact that plenty of outsiders are looking in when it comes to gaming. Hollywood, traditional sports, private equity firms like KKR and Blackstone, and big platform companies are also seeing all of the activity in games and they may want to figure out how to cash in on the action.

A historic opportunity

The Zynga+Peak game family.

Above: The Zynga+Peak game family.

Image Credit: Zynga

Nick Tuosto, managing director of advisory firm Liontree, has advised parties in 15 major transactions in the game industry in the past year. In his mind, some of the froth is justified as investors are finally catching on to the value that has been created by many game companies that have been delighting users and waiting for this day.

A prime example is Zynga, which went public in 2011, only to see its value collapse as it struggled in the transition from Facebook games to mobile games.

Under CEO Frank Gibeau, the company went on an acquisition spree, spending billions of dollars acquiring Gram Games, Peak Games, Small Giant Games, and Rollic. And that has paid off in hot games like Empires & Puzzles that have fueled Zynga’s earnings. In other words, the acquisitions have quickly paid off.

“Zynga’s performance has been driven over the last 3.5 years has been driven by M&A,” Tuosto said at our event. “They have been able to buy assets at a cheaper multiple than they themselves trade.”

Zynga’s stock price has gone up four-fold in the past five years, bringing the company back to its original IPO value in 2011. It has done through its aggressive acquisition strategy, Tuosto said. Zynga’s acquisition man, Chris Petrovic, decided to leave the company, only to resurface this week as the chief business officer at China’s FunPlus.

And when one company behaves like that, then the others have to participate as well. Even Nintendo joined in the M&A action, acquiring Next Level Games to ensure that the maker of Luigi’s Mansion didn’t fall into someone else’s hands.

The IDFA bust?

But as the late-buying retail investors of GameStop’s stock are discovering, what goes up must come down. You could say that the froth is flowing out of the cup. And I get the feeling that everybody is in a rush. The question is, “what could cause this window of opportunity to close?”

So many of our speakers at last week’s event — like Facebook game leaders Rick Kelley and Steve Webb — felt like the growth was just getting started.

But a game of musical chairs is going on, and when the music stops, someone won’t have a chair. In some ways, you have to time things right. If you bought GameStop stock to spite the short sellers or because you wanted to get rich, then you’ve got to find a fool who is dumber than you to buy the stock. If you don’t, you’ll get stuck holding the worthless stock.

Now I’ll admit this is not a brilliant observation. The trick will be identifying the point in the market when it’s about to change. I could be one of those people who hesitates on the sidelines until the moment when it becomes too late to act. When it does, then we’ll see investors react and companies change strategy. That means you have to look around for possible triggers for the bear market. I think that one of the things with potential to cause that is Apple’s changing platform policies. Apple is changing opt-in rules for its Identifier for Advertisers (IDFA), and that could make it a lot harder for iOS developers to advertise their games.

“We know that this year IDFA is going to be disruptive. It’s definitely not helpful that we don’t know when it’s going to happen,” Webb said. “Developers are having to plan their businesses with this hanging over them.”

Unity Technologies has 1.5 million monthly active users.

Above: Unity Technologies has 1.5 million monthly active users.

Image Credit: Unity

The advertising-driven businesses of Facebook and Google could take a hit from this, according to user-acquisition expert Eric Seufert. But so could others. Unity, Snap, and Playtika all warned that the IDFA change represents a risk to their businesses right now. Activision Blizzard believes its King business could benefit because it already has a large network of 240 million users and many of those willingly share their data. But smaller companies that are searching for hardcore gamers among a sea of users might have a harder time.

Game companies are at the mercy of the big tech giants that control their platforms. Mobile has become the biggest game market, accounting for 58% of industry revenue (according to market researcher SuperData), and given the investments of companies like EA and Activision Blizzard, mobile is almost certain to become an even bigger part of the industry in the future.

Brian Bowman, CEO of mobile marketing firm Consumer Acquisition, believes that IDFA could trigger an advertising and gaming apocalypse. But other folks think mobile games will overcome the IDFA hurdle and go on to greater growth.

App Annie expects mobile games to grow 20% to $120 billion in 2021. Part of the rationale is that the lockdown has lasted so long that those who turned to mobile games for the first time have now formed gaming habits. On top of that, people are playing mobile games at home even though they have access to both PCs or consoles.

Tuosto said a re-rating of valuations is happening right now, as Playtika was valued at 15 times its 2022 EBITDA estimates, or about three times the value that Candy Crush Saga maker King got when it went public in 2014. Playtika is generating a lot of cash from its social casino games, and investors weren’t worried that it could pay off its $2.3 billion in debt. He believes that the financial engines of the industry are only just getting started, as business model innovations like free-to-play, live operations, and subscriptions take root with gamers.

He points to the year-round engagement of the Call of Duty brand thanks to the combination of premium titles like Call of Duty: Black Ops — Cold War, Call of Duty: Warzone, and Call of Duty: Mobile. That has enabled Activision to transform Call of Duty from a billion-dollar per year franchise to a $3 billion franchise. Companies can grow these franchises over time or purchase them if they want to grow faster.

“This is the very tip of the iceberg,” Tuosto said. “There’s plenty of opportunities for both buyers and sellers to get win-win deals.”


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