Mergers and acquisitions: Behind game industry deals during a pandemic

2020 needs no introduction. While it was a horror show for many people all over the world. The world stood still and suddenly there weren’t any concerts to go to, any movies to watch at the theater, no Broadway, no live performance at all … instead, we were tucked away in our homes in an attempt to keep ourselves, our families, and our communities as safe as we could manage.

Gaming was the great connector in 2020 and the market agreed. During the “Mergers and Acquisitions: Behind The Deal During a Pandemic” panel for GamesBeat’s Driving Game Growth & Into the Metaverse in partnership with Facebook, a number of business development and private investment experts weighed in on what M&A looked like 2020, pandemic and all.

Nate Morgan, the global gaming Lead for Facebook Audience Network, moderated a conversation with Kris Davis, VP of business development at Kabam; Rob Ricca, VP of corporate development at Scopely; and Nick Tuosto from LionTree.

To set the stage for the panel, Morgan stated, “2020 was a massive year for games M&A. Pitchbook tracked over 1,500 transactions to a total deal value of $43 billion within entertainment software.”

In the spotlight

Amid a global pandemic, gaming was the entertainment industry’s darling.

“Going into the global pandemic, it was unclear what the macro picture [of gaming] would look like,” Tuosto said, when asked to paint a picture of the game industry in the early days of the pandemic. “There was a lot of uncertainty as to whether or not deals could be done remotely. It’s been such a large piece of the M&A equation to understand the team’s motivation, to build rapport, to understand how studios are built, the culture … very unclear at the outset whether or not there would be buyer convictions sufficient to keep the engine running. And it’s actually been far in excess in terms of buyer appetite and seller motivations have been high as well.”

According to Tuosto, social connection is what audiences were really craving in 2020. We were apart from our friends and family, but gaming — whether it was Among Us, Animal Crossing, Call of Duty, or Scrabble Go — was what brought us back together. As such, there were good levels of confidence for both buyers and sellers in the marketplace.

“… You’ve seen multiples really move in the right direction,” Tuosto continued. “As buyers have been rewarded for buying other companies. When you look at Zynga, for example, their performance over the last three-and-a-half years, it has been largely driven by M&A. Zynga, as a public company since the beginning of 2017, is up almost [fourfold]. So as a public stock, it has performed tremendously well by being aggressive in M&A.”

Ricca agreed, going on to say that it seems as though many investors, especially those that had ignored gaming in the past, have “woken up to, ‘Oh, wow, there’s a lot more here than what we were thinking.’”

Investors have always been skittish around the game industry. Those that have never really worked with a studio or platform before don’t know what to expect and it becomes a lot of hand-wringing and risk-averse micromanaging before they pass on the investment altogether. It’s not a universal truth, of course, and thanks to 2020, gaming as a sector is looking better and better for even the most timid investors.

A different landscape

2020 effectively leveled the playing field for investors, even the ones who don’t understand gaming. This was partially because gaming saw such a lift from people staying and home and partially because of the value being created at companies who practiced responsible M&A.

Kabam’s approach to M&A in 2020 (and beyond), according to Davis, is centered around people, not necessarily projects.

“First and foremost at Kabam, we look for great game makers that have a great deal of passion and conviction for the things that they’re working on,” Davis noted. “We also look for excellence in design, art, production, and really, the ability to grow new IP. We are also looking for games with deep RPG, social, and monetization mechanics that create an opportunity to grow for many years post-launch. And finally, in terms of the merger piece, [we think about] shared company values, building diverse teams, and we’re really looking for folks to build a collaborative and innovative culture.”

Ricca’s approach at Scopely is more aligned with bringing partnerships into the fold full-time, much as Zynga has with many of its mergers and acquisitions in the last five years.

“It really started on the [business development] side, because Scopely really was more of a technology play, building out all of the publishing infrastructure and then going out and finding great studios to partner with and bring them onto that platform,” Ricca said. “And now that we’ve really perfected that model, we started acquiring studios that we’ve partnered with, or had business development relationships with, over the years. Our main focus is going out there and trying to find great game makers, great games, that we can kind of plug into this platform.”

IPOs are another big chunk of the story of 2020 and into 2021, with Unity, Roblox, and Playtika leading the charge.

“There has been incredible value creation by executing on M&A opportunities,” Tuosto noted. “Companies like Zynga have proven that they can do five acquisitions in three years and there will probably be more to come, which means whether it’s organic or inorganic, there is just a different sustainability of growth today and that perception is starting to manifest in very different multiples. When we look at the way a company like Playtika trades — Playtika went public last week — [and] trades at 15-times its 2022 earnings estimate.”

Mergers & Monetization

Tuosto took a look back at where we were in 2010, in order to better understand where we’re going. He reminded us that “even the biggest triple-A companies in gaming – Electronic Arts and Activision — didn’t trade all that richly in terms of the multiple investors ascribed to their expected revenues and profits.”

We all know why: gaming is hit-driven and there is a lot of risk associated with that.

Where we are today, especially as a result of monetization shifts towards games like Ultimate Team and Call of Duty with its free-to-play Blackout mode.

“As a result, you’ve seen EA trade dramatically higher in terms of the expectation of quality and credit in the growth, which reflects in the multiple that EA trades at,” Tuosto elaborated.

Mobile is a different story for IPOs, since there is a lot more competition for those market and player segments.

“It’s a much more chewable exercise when you think about the most casual experiences on mobile,” Tuosto continued. “A game like Helix Jump might occupy someone’s attention for a short while, but the average player churns out of those experiences quickly. And the companies that went public, with mobile expertise and tremendous success (like Candy Crush, for King), they had significant pessimism in how they traded. So King actually traded as low as two-and-a-half times its expected earnings. That’s about the lowest multiple you’ll find in any entertainment capacity. Period.”

The reason why we’ve seen the struggles with investors understanding gaming overall is that it’s a completely backwards approach to monetization. Tuosto referred to users on YouTube and Snapchat as the example. They don’t expect a “free ride.”

“All of digital entertainment involves some sort of exchange of value for the entertainment received… except gaming,” Tuosto went on to say. “The market sort of evolved backwards. It started with a premium purchase of a game like Angry Birds and has evolved into vastly dominated by in-app purchases. But today, it’s just a small sliver of the player population that pays.”

Looking ahead, as developers and publishers continue to grapple with long-term monetization strategies for an audience that is usually reluctant to pay, the panelists weighed in on what to expect from 2021.

Ricca anticipates “scale, diversity, and consistency” in business development and investment in the game industry for 2021.

“I think that M&A is helping to drive a lot of that,” Ricca said. “It’s a consolidating industry, but it’s going to be even more so in 2021. I think a big move there will be more cross-platform. With the pandemic, another spotlight has been on social in gaming and being able to log into a game like Scrabble Go [a Scopely mobile title] and maybe I can’t go visit my mom right now, but I can play Scrabble with her.”

Davis is optimistic about the year, which he believes is shared by developers “and a lot of interest in strategic partnership.”

The last thing that Tuosto noted was that investors and sellers alike should keep an eye on a “relatively new phenomenon” called “SPAC mergers,” for special purpose acquisition company, where a private company goes public by being acquired by a public shell company.

“There are all sorts of game companies that are considering going public via a merger with a shell corporation that basically just holds cash,” Tuosto concluded. “It’s an alternative to going public and it’s one that provides more visibility, time to market, ability to drive a different outcome. Skillz was a great testament to that. They now trade at thirty-times revenue. So, you can control the messaging and the positioning and the investor-base that you end up building with a lot more transparency into price.”

M&A in 2020 was a roller-coaster ride for buyers and sellers in very different ways. Business in games exploded. Investors took notice. And the interplay created a landscape that made it easy for investors to pay more attention to what gaming could offer. As the United States (and many other countries) continue to contend with COVID-19, 2021 could prove to be even more of a wild ride for M&A in gaming.