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"We are not even in the final stage yet": Analysts on consolidation

Experts discuss last month's wave of large-scale M&A and whether it's cooling off or just getting started

With Sony's $3.6 billion purchase of Bungie, Take-Two's $12.7 billion deal for mobile giant Zynga, and Microsoft's massive $68.7 billion acquisition for Activision Blizzard, the month of January has seen a lot of consolidation.

Those three deals alone total $85 billion, which matches the mergers and acquisitions total for all of 2021, which was itself a record for the industry.

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 turning, and I believe we are definitely not even in the final stage yet," Kantan Games' Dr. Serkan Toto tells us.

Toto explains further that with regards to the recent mergers, platform holders such as Sony and Microsoft target the top of the market, whereas other companies such as Embracer focus on smaller and mid sized gaming studios. "Which leads to the industry overall getting squeezed from both sides," Toto says.

Piers Harding-Rolls of Ampere Analysis sees the mergers of the past month to be good for multiple parties. He tells us that it's been positive for investors, independent studios that are happy to exit at strong valuations, and for the valuations of game companies that already have content portfolios and talent.

"I think excessive consolidation (and we're not there yet) impacts the ability of smaller independent publishers and developers to compete in the long term"

Piers Harding-Rolls

"I think excessive consolidation (and we're not there yet) impacts the ability of smaller independent publishers and developers to compete in the long term," Harding-Rolls says.

"You could argue that Microsoft's big acquisitions to bring in lots of studios will reduce its dependence on third-party content, which potentially has a knock-on impact on its willingness to pay for games to bring into Xbox Game Pass for example," Harding-Rolls says. "In turn, this might impact the breadth 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 go up.

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

However, Pachter says the 2020 acquisition of Bethesda was "expensive" given its game library even though it made sense for Microsoft to add to its Game Pass offerings.

As for this week's big deal, Pachter sees the Bungie acquisition as exceptionally pricey.

"Bungie is really expensive, with no meaningful 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 Pachter

"It doesn't help Sony much in building out PS Now, and I don't know that it signals much more than desperation. I would have expected Warner Interactive to go for that amount (big catalog and great studios), now I think Warner is worth two to three times as much as Bungie."

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

In addition, he says that potential buyers such as Amazon, Google, Apple, and Netflix haven't been ones to outbid anyone.

DFC Intelligence owner David Cole believes that the recent Sony and Bungie deal 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 that were concerned about Sony being able to compete with Microsoft's acquisitions.

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

Colin Sebastian

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

Baird's senior analyst Colin Sebastian says that because each acquisition is different it's difficult to gauge who this deal is good or bad for. He explains further that mergers are dependent on a number of factors such as employee retainment, business improvement, and organization efficiency.

"So time will tell whether any one acquisition turns out well. More generally, industry consolidation can help accelerate the development of new products or new technologies," Sebastian says. "For example, if by owning Call of Duty, Microsoft can legitimize its cloud gaming and subscription services, that could mark an important turning point for both Microsoft as well as the industry."

With regards to the Sony and Bungie deal Niko Partners senior analyst Daniel Ahmad says that the Destiny maker has been given a lot of autonomy.

"Destiny 2 recently became a free to play title, which opens up the growth possibility because in Asia"

Daniel Ahmad

"Bungie has also been looking to become a 'global multi-media entertainment company' which could drive synergies with PlayStation's Productions segment (movies/TV)," says Ahmad.

"This deal gives Bungie the stability needed to keep developing the Destiny franchise and new IP with the creative freedom to operate as an independent studio and self-publish their titles."

Ahmad says that with the deal, Sony benefits having acquired AAA live service experience as it expands its first-party studios. He sees a 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 growth possibility because in Asia, which is more than 60% of the global market for PC and mobile gaming, free-to-play is far and away the dominant business model."

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

"Among the big public companies, there are Take-Two or EA in the US, Ubisoft in Europe and the likes of Square Enix, Capcom or Sega in Japan that could be next," Toto says.

"Among the big public companies, there are Take-Two or EA in the US, Ubisoft in Europe and the likes of Square Enix, Capcom or Sega in Japan that could be next"

Dr. Serkan Toto

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

"Beyond that, companies are also feeling pressure to have a stake in emerging technology and services, such as metaverses, VR/AR, NFTs and so on," Sebastian explains.

"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 an interest in getting more deeply involved in the game space, and they're not alone.

"Tencent has already made some major investments in western companies on the mobile side but may want to expand their presence. The challenge is that for all those companies fairly new to the space, it is an expensive/risky investment. It is hard to merge creative companies so much of the value is in the core IP."

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

"I do think the big deals that have been completed in recent weeks do increase the chance of another major acquisition or merger at some point as companies reassess their strategies in the light of the new competitive landscape," he says.

"I think pure-play publishers will be feeling strategically exposed to an extent and will be considering how they can best compete versus the big tech players and the games platform companies."

Harding-Rolls believes we may see another purchase of a larger publisher or a merger between them, particularly as big tech considers Microsoft's acquisitions and ambitions for the metaverse concept they're also chasing.

Sony has already said that there are more acquisitions to follow, and Harding-Rolls believes that the purchase of Bungie will be the size of the investments we can expect from the platform holder going forward.

In addition, Harding-Rolls says that other potential buyers are likely to not make the same kind of deals.

"Tencent is financially very strong but being a Chinese company will face scrutiny over any major deals it seeks to complete in the West, which puts it at a disadvantage versus non-Chinese competitors," he explains.

"Consolidation leads to more consolidation, so this is just getting started"

David Cole

"As a result, I think it will remain quite targeted and smaller in its deals. Amazon and Google have not shown the appetite to invest very heavily in the games space, but Microsoft's ambition may prompt a reassessment. Meta is a candidate for a sizable move."

He continues, "I think it makes companies like Embracer look pretty smart from a 'buy low, sell high' prospect. They got in while the market was a relative bargain."

Ahmad refers to Niko Partners' 2022 predictions, one of which was that M&A activity will continue playing a notable role this year and beyond.

"Technology and media companies in particular are viewing the game publisher and developer companies to have valuable IP, talent and content," he tells us. "This leads us to consider not 'Will there be another acquisition?' but rather 'Who is next?'"

Cole agrees, saying, "Consolidation leads to more consolidation, so this is just getting started."

(In the interest of disclosure, Baird asked for it to be noted that the company deals in securities of Activision Blizzard, Electronic Arts, Take-Two, Zynga, and other industry companies.)

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