M&A

M&A – short for mergers and acquisitions, refers to the business practice of buying and selling companies. A company can either be acquired as a whole by another company, two companies can merge to form a new company, or only selected company assets may be acquired. The strategic reason for buying a company might be to gain expertise in a certain market or geographic area, such as acquiring a mobile game developer to expand into mobile gaming as a publisher, to buy out a competitor, to gain technical know-how, or name a few. M&A deals can also have financial reasons, such as Embracer Group’s divestiture of many of its studios to reduce debt and increase liquidity following the failure of an undisclosed US$2B deal in 2023.[1] This includes the sale of Gearbox to Take-Two Interactive for US$460M and Saber Interactive to Beacon Interactive for US$247M, both announced in March 2024.[2]

Types of M&A deals

An M&A transaction can be categorized into two main types, depending on the nature of the deal. An acquisition will be executed either as an asset deal or as a share deal. In a share deal, the acquirer buys company shares, leaving the company’s structure intact but acquiring a majority stake, thereby becoming its new owner. In an asset deal, the acquirer purchases the company’s parts, or assets, such as its IP portfolio, employees, customer database, etc. Often the remainder of the company will then be liquidated, ending its business operations. In a share deal, shares may be purchased either over the stock market or in a bilateral agreement between acquirer and shareholders, enabling them to set a price other than, and often at a premium to, the market price. This is referred to as a tender offer. In 2023, Sega made a tender offer to Rovio, the maker of Angry Birds, acquiring 96% of Rovio shares and thereby becoming the majority stakeholder.[3] This acquisition was made to allow Sega to expand in the mobile gaming market.

Acquisitions will sometimes be made by a company’s executives, enabling managers to own (or buy back) their company. This is referred to as a management-led buyout (MBO). For example, the previously Embracer-owned Saber Interactive was purchased by Beacon Interactive, a company owned by Saber Interactive’s co-founder.[4]

When a company attempts to take over another without approval of the target company’s management, this is referred to a hostile takeover. In 2016, French multimedia group Vivendi attempted a takeover of Gameloft and Ubisoft against the companies’ wishes by incrementally purchasing shares in both companies. Vivendi succeeded in taking over Gameloft by purchasing enough shares to force a mandatory takeover bid under French law. A majority of shareholders agreed to the bid against express advice from Gameloft’s board of directors, granting Vivendi an absolute majority in the company. However, Vivendi was not able to acquire a sufficiently high stake in Ubisoft, leading it to end its takeover attempt and sell its shares in the company in 2018.[5]

Companies may also sell off select areas of their business or subsidiaries to streamline operations. This is referred to as a divestiture. Another form of divestiture is the split of a company into new corporate entities. After divesting multiple studios, Embracer Group announced on April 22, 2024 that it will spin off two new companies and split its assets between them.[6] While Embracer will rename itself and continue handling its AAA game business (in particular the Tomb Raider and The Lord of the Rings IPs), the two spin-offs will handle tabletop gaming and indie and F2P games respectively. As spin-offs, shares in the companies will be distributed to existing Embracer Group shareholders. This is the culmination of Embracer’s restructuring following liquidity troubles beginning in 2023.

How does an acquisition work?

A potential acquisition target company will first be valued, giving the acquirer an idea of its worth and benefit. The acquirer then makes the target an offer, beginning negotiations. This will usually be flanked by non-disclosure agreements (NDAs) to ensure confidentiality. When discussions have solidified, a (generally non-binding) letter of intent is issued. If the offer is accepted, the acquirer conducts in-depth due diligence using materials provided by the acquisition target (see Due Diligence) to confirm that the valuation is accurate and assess potential legal hurdles to acquisition. After completing due diligence and potential further negotiations, a sales contract is signed. This will usually be either a Share Purchase Agreement or an Asset Purchase Agreement, depending on the manner of integration determined by the contracting parties. Barring any complications such as regulatory hurdles (see Antitrust Law and Competition Law), the deal is then executed, referred to as closing. Finally, the target company is integrated with the acquirer.

Relevance of M&A in the video game industry

M&A deals play an important role in the video game industry, both for AAA publishers and smaller studios. They provide an avenue of financing both for larger companies that may be experiencing financial distress and SMEs looking to expand and access greater financial resources. It is also very common for publishers to acquire companies to establish or expand their presence in certain markets, geographic locations or areas of technology.

According to Drake Star’s Global Gaming Report 2023, the total disclosed value for closed deals in 2023 was a record-breaking US$86B. This is owed mainly to the closing of the largest ever gaming-related deal and one of the largest deals in tech generally in October 2023, Microsoft’s acquisition of Activision Blizzard for US$68B. The total disclosed value for the 960 deals announced in 2023 was over US$20B, which is on par with deal value levels in prior years, discounting the Activision super-acquisition.[7] Other large recent deals include the acquisition of mobile game developer Zynga by Take-Two for US$12B in 2022, Microsoft’s purchase of publisher Zenimax in 2021 for US$7B and Savvy Games Group’s acquisition of mobile developer Scopely in 2023 for US$4.9B.[8]

[1] James Batchelor, ‘Embracer on collapsed $2bn deal: “We have put this behind us”’, GamesIndustry.biz (18 August 2023), <https://www.gamesindustry.biz/embracer-on-collapsed-2bn-deal-we-have-put-this-behind-us>.

[2] Business Wire, ‘Take-Two Interactive Software, Inc. to Acquire The Gearbox Entertainment Company Inc., Developer of Highly Successful Borderlands Franchise’ (27 March 2024), <https://www.businesswire.com/news/home/20240327928202/en/>; Embracer Group, ‘Embracer Group Ceases All Operations in Russia Through the Divestment of Selected Assets from the Operative Group Saber Interactive’ (Press Release, 14 March 2024), <https://embracer.com/releases/embracer-group-ceases-all-operations-in-russia-through-the-divestment-of-selected-assets-from-the-operative-group-saber-interactive/>.

[3] Rovio Investors, ‘Correction: Rovio Entertainment Corp.: Final result of Sega Europe Limited’s recommended cash offer for all the shares and options in Rovio Entertainment Corporation’ (Stock Exchange Release, 10 August 2023), <https://investors.rovio.com/en/news-and-events/stock-exchange-releases/correction-rovio-entertainment-corp-final-result-sega>.

[4] See Note 2.

[5] Mike Futter, ‘Vivendi’s Hostile Takeover of Gameloft And Ubisoft Explained’, GameInformer (2 June 2016), <https://www.gameinformer.com/b/features/archive/2016/06/02/vivendis-hostile-takeover-of-gameloft-and-ubisoft-explained.aspx>; Samit Sarkar, ‘Ubisoft finally fends off Vivendi takeover bid through Tencent partnership’, Polygon (20 March 2018), <https://www.polygon.com/2018/3/20/17144094/ubisoft-vivendi-sells-stake-tencent-deal>.

[6] Embracer Group, ‘Embracer Group Announces Its Intention to Transform into Three Standalone Publicly Listed Entities at Nasdaq Stockholm’ (Press Release, 22 April 2024), <https://embracer.com/releases/embracer-group-announces-its-intention-to-transform-into-three-standalone-publicly-listed-entities-at-nasdaq-stockholm/>.

[7] Drake Star, Global Gaming Report 2023, 3.

[8] InvestGame, Gaming Deals Report 2023, 15.