Gaming's Consolidation Spree Is Far From Over

In September, Playtika announced a $1.95bn acquisition of Dice Dreams maker SuperPlay. CFO Craig Abrahams stated, "M&A continues to be a key driver of growth for us...and it will continue to be key for us." While Playtika has historically relied heavily on M&A, there is much reason to believe this will be true for several players in the industry.

The peak of M&A in gaming was in 2022, when volume reached $102bn. Since then, it has rapidly declined alongside the average deal size, almost halving from $103.1m in 2022 to $59.6m in H2 2024.

It has been a tough year for gaming. During the flush of liquidity in 2021-22, given COVID lockdown restrictions and increased consumer spend in gaming, publishers hired aggressively in pursuit of more ambitious roadmaps and experimental growth strategies. However, this year has been plagued with what feels like weekly layoffs (approximately 23,700 in 2023-24 as per latest estimates), and so several publishers have been forced to reset their focus back to the basics.

Despite this, notable trends continue to form, rapidly expanding the universe of acquirers and targets, providing a solid strategic rationale for a robust M&A landscape.

Firstly, gaming's ascendancy as the prime destination for socializing shows no sign of slowing down. Despite the harsh conditions the last year has left gaming in, social platforms such as Roblox and Fortnite continue to evolve into venues where people can hang out and participate in non-gaming activities. Estimates suggest players spend 6 billion hours each month using Roblox, which is approximately double that of Disney+'s aggregate monthly watch time of 3.1 billion hours. This has multiplied the dimensions through which gamers can act as economic agents in their digital time, either as producers or consumers, and ultimately increasing their lifetime value as they continue contributing a larger share of their digital consumption time toward games, and away from other forms of media. Acquiring intellectual property is no longer about taking loyal fanbases away from competitors in the name of exclusivity; instead, it is about fueling a never-ending content factory for live service games that need continuous updates to keep things fresh for ever-growing player bases. Electronic Arts is the latest giant to launch its attempt in the social arena with the EA Sports App, a social networking app with sports content and live sports data focused on global football.

Beyond playtime, social platforms offer games a valuable tool for monetisation. The gaming industry has failed to innovatively construct new business models to sufficiently rebound in a post-IDFA (identifier for advertisers) world. In combination with the normalisation of free-to-play games, this has led to monetisation in gaming lagging far behind other forms of media. Konvoy Ventures estimates hourly revenue per consumer in gaming to be between $0.05 and $0.07, dwarfed by streaming giants such as Disney+ at $0.49, and movies at $5. Gaming studios which acquire social platforms could find innovative ways to leverage them as utility engagement tools to overcome long-standing challenges of monetising in gaming, such as gamers despising paywalls. Time will tell how Voodoo manages this following their €500m acquisition of social network BeReal.

Secondly, esports is undergoing a painful industry reset of its cost base. With lower salaries, smaller prize pools, and countless layoffs, several esports organisations are prime acquisition targets for larger cash-flush players who remain optimistic about the category in the long term. In the last year, several companies acquired previously highly-valued organisations, such as FazeClan's $17m sale to GameSquare, despite its $725m SPAC in 2022 and, most recently, David Beckham's Guild Esports, which is likely to be sold to DCB Sports after its share price declined 99% since listing on the London Stock Exchange in 2020.

Thirdly, the wave of generative AI means there are numerous small-cap companies working on tools with powerful gaming use cases. These include on-demand generation of 3D in-game assets and environments, bots to help manage communities, rapid creation of story content, and 3D animation and platforms to make user-generated content easier for players, to name a few. As the AI hype tapers off in the coming years, many of these companies will likely not have reached profitability yet will have valuable assets larger gaming studios can acquire at favourable valuations. The current state of esports provides a blueprint for how the AI trend will likely develop.

Favourable transaction conditions underpin all of this. At the end of Q2 2024, gaming companies and technology companies with major gaming divisions, viz., Amazon, Apple, Meta, Google, Tencent, Microsoft, Sony and Netflix, held a combined $257bn of cash on their balance sheets, according to Konvoy Ventures. This is up from $221bn in Q2 2023. As we enter a lower interest rate macroeconomic environment, shareholders will be keen to see idle cash being put to productive use. Furthermore, technology companies with gaming divisions are primed for stock deals, boosted mainly by the AI wave, having seen their share price grow by 16% on average from 1st January 2022 until 24th September 2024, versus HERO (a video games & esports exchange-traded fund), which has declined by 19% in the same period. Moreover, investors have many gaming companies sitting in their portfolios for several years, most of which will unlikely raise again or reach metrics to justify an IPO. Approximately 3,450 investor-backed gaming companies have not raised funding in the last three years, says an independent analysis by Crunchbase data. Investors will be facing growing exit pressure from LPs.

Within the larger M&A backdrop, US leveraged loan issuances reached a record $390bn in volume, whereas the portion of issuance driven by M&A has remained stagnant at $30bn (vs $29bn in Q1), according to Fitch Ratings. Such an imbalance indicates strong supply for institutions to give loans yet relatively weak demand from acquirers, primarily private equity firms. As interest rates lower, we can expect financial sponsors to respond with more aggressive deal making.

The primary limiting factor here undoubtedly is regulation. Despite the failed attempts from the Federal Trade Commission to block the Microsoft-Activision takeover, or Meta's acquisition of Within, there is a hangover that looms as regulators reinforce their commitments to increase scrutiny of mergers. To date, this has taken the form of the US Department of Justice Antitrust Division and Federal Trade Commission's 2023 Draft Merger Guidelines, which clearly state that transactions which may aggressively eliminate new entrants, are a part of a multiple acquisition growth strategy and involve multi-sided platforms are in their crosshairs. Gaming giants who are interested in cross-border deals, have multi-sided platform activity, and already have significant market share in key categories, are in the direct firing lines. For now, a regulatory response to a potential sale of Tiktok's US operations is one of our best read-throughs into how regulators will navigate high-profile consumer technology M&A moving forward. As a result, smaller deals will have a much easier time. For example, Nazara raised $108m to pursue add-on M&A opportunities in India. Expect to see more transactions which are both small (sub-$100m) and confined to a few geographies and platforms.

(Serge-Raymond Nzabandora is the Corporate Development and Finance Manager at Yield Guild Games, the largest web3 gaming guild network. Previously, he was an investment banker in London. He holds degrees from Tsinghua University as a Schwarzman Scholar and the University of Oxford. He is currently based in Hong Kong.)