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M&A the Chinese way: 5 surprising acquisitions of game companies

Reading between the lines
M&A the Chinese way: 5 surprising acquisitions of game companies

The news that a Chinese textile company - Ningxia Zhongyin Cashmere - is getting involved in the deal to buy Chinese game publisher Shanda Games might raise some eyebrows.

After all, the equivalent deal in the US would be something like Gore-Tek outfit W.L. Gore deciding to buy into EA.

Yet, for watchers of the Chinese market, this sort of M&A activity from non-gaming publicly-owned companies has been happening fairly regularly over the past 12 months.

Odd expansions

In some cases, the deals seem to make no sense. Examples include hotel management, pipe manufacturing, and apparel companies apparently buying game companies.

Sometimes these are officially stated to be reverse listings, giving the game companies the ability to get on Chinese stock exchanges in a cheap manner, albeit at the risk of confusing outside observers and raising rumours of insider dealings and inflated valuations. 

There's also sentiment that the markets are a closing opportunity for game companies. 

However, Mark Natkin, MD of Chinese-focused market consultancy Marbridge Consulting, cautions that in many cases, the moves do make sense.

"Many Shanghai- and Shenzhen-listed companies in traditional industries, seeing the surge in growth in China's mobile gaming industry, see acquisition of a mobile gaming firm as a good bet for propping up earnings," he states.

"As listed companies, with good access to capital, they can help the acquired gaming companies better afford adaptation rights (from films, online novels, TV dramas, and other popular content), and also fees for licensing other domestic or foreign developers' games.

"This is something which has become an increasingly important source of competitive advantage in China's mobile gaming space."

Nevertheless, here are our favourite 'weird' Chinese M&A deals so far.

#1: Chinese construction company spends $960 million on FunPlus

FunPlus is best known for its highly succesful Facebook hit Family Farm, which it's since bought to mobile.

Still, the news that a publicly traded building construction company called Zhongji Holding (SHA:600634) (aka Shanghai Zhongji Investment Hldg Co Ltd) was going to spend $960 million to acquire part of the company was a big surprise.

The deal sees Zhongji buying FunPlus' subsidiary DianDian - which contains all its social games - leaving FunPlus with half of its current 250 staff and a lot of cash for global reinvention and expansion.

Certainly, if the deal goes through - it won't be completed until 2015 - looks like a great deal for FunPlus. As for what Zhongji is up to, it's actually looking to raise $1.4 billion in cash to also buy an unnamed games company and an unnamed film production company.

Quite whether it will keep on being a construction company remains unclear.

#2: Umbrella company spends $600 million buying Youzu

The Susino Umbrella Company used to be a respected manufacturer and global distributor of umbrellas.

However, in 2013, it decide to make a radical change, spending over $600 million on Chinese game publisher Youzu. It used to be succesful PC developer, which - in keeping with the broader trends in the Chinese market - has since switched its focus to mobiles games.

What happened following the deal was that the combined company sold off all its umbrella-related assets to another company, meaning that Youzu effectively replaced Susino Umbrella Company on the Shenzen stock exchange.

Indeed, it uses the same trading code as Susino Umbrella Company did - SHE:002174 - but formally renamed itself in June 2014 as Youzu Interactive.

Of course, this sort of thing is entirely legal, if somewhat odd given that Youzu could have formally applied to list on the exchange directly. Certainly, it's cheaper to reverse-list in this way, but it's also much less transparent meaning that assets - in this case Youzu or Susino Umbrella Company - can be bought and sold for inflated or deflated values.

#3: Glass company buys MMORPG dev WuShen for $150 million

As the name makes clear, Anhui Deli Household Glass Co. (SHE:002571) is a household glass manufacturer.

That's not the sort ot outfit you'd think would be getting into games. Nevertheless it bought Beijing Wushen Century Network Technology Limited (aka WuShen) for $150 million.

Founded in 2008, WuShen currently operates seven MMORPGs and has four mobile games in development.

It's not clear (geddit!) whether this is a reverse-listing or a more straightforward acquisition. But the fact that a further $150 million will be invested to kickstart mobile game operations, and the news that Anhui Deli Household Glass Co. is in talks to buy a movie/TV production company, suggests it is now serious about things other than making glass.

#4: Wood flooring company buys Zeus Interactive for $400 million

Founded in 2003, Dalian Kemian Wood Industry (SHE:002354) was a specialist in wood flooring. But despite an annual turnover of around $60 million, it suspended its shares in late 2013, before issuing $300 million in new stock to buy web gamemaker Zeus Interactive.

It also provided the company with 130 million discounted shares in a deal that was worth around $400 million.

The result was the Zeus became the majority shareholder of Dalian Kemian, with media company Enlight Media also gaining around 6 percent of the stock.

As you might expect given the different amount of cash involved, this deal looks strongly like a reverse-listing, although at the time of writing, the combined Zeus/Dalian Kemian outfit is still operating under the Dalian Kemian name.

#5: Animoca Brands reverse-lists into Black Fire Minerals

Not all Chinese companies are opaque in their dealings however. Hong Kong-based Animoca was very clear about its listing on the Australian Stock Exchange.

It spun out a part of its company - Animoca Brands - via a reverse-takeover of natural resource outfit Black Fire Minerals.

As part of the deal, Black Fire raised $3-5 million in additional cash, sold of its assets and the board membership was changed, with the new outfit being renamed Animoca Brands Corporation.

Clean, transparent and above board, it will begin trading on 25 September.