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What impact is COVID-19 having on video game deals? | Opinion

Wiggin LLP's Ciaran Hickey and Gerard Lee discuss the prospects for investments and acquisitions during a pandemic

Amid the unprecedented disruption to the global economy caused by COVID-19, the video games sector has shown signs of resilience as both pre-existing and new deals continue to progress.

This remains a challenging time for businesses across the digital media sectors, particularly as film and television productions and sports fixtures are cancelled or postponed.

However, video games businesses are comparatively well-placed to press ahead with their work, with most development studios having switched very effectively to working from homes (although some contractual issues around confidentiality and security have needed to be addressed, and some logistical difficulties with processes like motion capture and voiceover recordings may slow down the development process).

Ciaran Hickey, Wiggin

That said, no sector is entirely immune to what is likely to lead to a global slowdown in investment or mergers and acquisition (M&A) activity for the rest of 2020 and quite possibly beyond, as acquirers and investors bulk up their cash buffers to weather the storm.

Nevertheless, thanks to the increased consumer demand for games and the reduction in the value of sterling as a result of the pandemic, UK developers of varying size and maturity may now look like increasingly attractive targets to acquirers and investors, who tell us that they are still looking for good-value opportunities to deploy their cash reserves and capitalise on back catalogues of existing games and mature digital delivery channels.

As governments impose social distancing measures, the industry is clearly benefitting from a boom in sales, profile and engagement.

Elliott Myers, CEO of Roto VR, which raised £1.5 million in a funding round last month, says: "With the UK now in lockdown, people all over the country are having to find ways to keep themselves and their families occupied for extended periods of time -- from Netflix and Amazon Prime to the newly launched Disney + and of course, games consoles.

"Despite the unprecedented global uncertainty, there are grounds for optimism for those seeking to make deals in the video games sector"

"However, where gaming differs from other forms of home entertainment is that it provides a deeper sense of engagement, especially in VR, which of course also offers a much-needed sense of escapism."

Indeed, according to recent analysis by GamesIndustry.biz, the longer a country has been in lockdown, the more digital sales of existing titles have increased. Meanwhile, the recent BAFTA Games Awards made mainstream news headlines, Steam has set a record of 7.25 million gamers playing concurrently, and the World Health Organisation has promoted the industry's #PlayApartTogether initiative encouraging users to socialise at home through gaming, emphasising its mental health benefits.

Acquirers and investors will take further confidence from a projected boost in targets' financials when industry events in the sector resume, particularly given the scheduled launch of the next generation of consoles by Sony and Microsoft in late 2020 (disruption to manufacturing operations notwithstanding).

The shock to stock markets around the world, and the potentially long road to share price recovery ahead, mean that many targets will not see listing as a viable exit for the foreseeable future, so acquirers should recognise the current situation as an opportunity to approach potential acquisition targets whilst private M&A remains the most attractive exit prospect for them.

Gerard Lee, Wiggin

That said, M&A in the sector has undoubtedly suffered a blow with the cancellation and postponement of business and consumer events and industry trade shows such as GDC and E3, where introductions are made, press hype is generated and deals are struck.

In addition, moves such as Microsoft's announcement that all of its events will be 'digital first' until August 2021 and disruption to flagship releases like Final Fantasy VII, The Last of Us Part 2 and Iron Man VR along with delays to multiplex-filling film tie-ins means that high-profile 'hooks' for non-industry investors will be reduced.

This means that targets may need to rely more on investments by existing shareholders than they anticipated, with financial investors correspondingly inclined to stick with investee companies that they know well. A positive example of this trend was last month's $17.25 million follow-on investment in Cloud Imperium Games, the developer of Star Citizen, after an initial investment of $46 million in 2018.

In the meantime, the industry as a whole is rallying to take measures to mitigate the impact of the current disruption as much possible, revamping events such as GDC (GDC Summer), EGX (Rezzed Digital) and USC Games Expo as digital conferences and creating virtual networking platforms like the WN Hub.

On a related note, the GDC Relief Fund has raised over $279,000 for developers impacted by the cancellation of events due to COVID-19. From a policy perspective, the UK game industry trade body TIGA has recommended changes to the video game tax relief model in light of the pandemic, along with a number of other recommendations.

So despite the unprecedented global uncertainty, there are grounds for optimism for those seeking to make deals in the video games sector in the coming months, particularly given the industry's proven resilience during the 2008 financial crisis.

Even if an investment or M&A process is not imminent, this time can be used productively by all independent businesses in the industry to prepare for such processes to ensure that deals can be done quickly once things return to some kind of normality.

Ciaran Hickey is a partner in Wiggin's Corporate group who advises clients across the technology and media sectors. Gerard Lee advises on a broad range of corporate and finance matters. You can find more information about Wiggin at the company's website.