There are strong macroeconomic reasons why Chinese companies have been dropping large amounts of money on games studios - notably Western game studios - in recent years.
The most obvious reason is the fast-expanding Chinese economy has generated lots of profits.
These have to be invested in something.
Chinese assets, whether companies, shares or property, are now expensive and - some feel - markets are due correction to remove bad debts.
Hence, for the past five years, there’s been a wider trend for the Chinese to derisk and diversify their cash by converting them into international assets.
Chinese companies diversify by converting their cash into international assets.
These can be relatively cheap, hedged against the potential for the yuan to weaken against the dollar, and also beyond the control of the Chinese government, which has been cracking down on some of the more speculative currency outflows.
In the game
More specifically, there are strong macroeconomic reasons why international games companies are seen as particularly valuable.
Over the past couple of years, the once PC-dominated Chinese game market has seen multiple years of triple-digit-growth, the majority of which has come from mobile games.
The Chinese mobile games market is now the world’s largest at $10 billion annually.
However, it’s now difficult and/or expensive to buy into this domestic growth, mainly because two huge publishing companies - Tencent and NetEase - control the majority of revenues and profits. That’s why new Chinese game investments focus on emerging sectors such as eSports and VR.
And it’s this situation which provides the context for what, at first glance, appear to be some truly bizarre deals.
- Chinese chemical firm buys Talking Tom developer Outfit7 (though only confirmed officially as a consortium of investors from Asia).
- Chinese iron ore mining outfit buys UK browser outfit Jagex.
- Chinese chicken supplier buys UK developer Splash Damage, adding it to previously purchased Canadian studio Digital Extremes.
Such jarring partnerships have been played out within the Chinese market for years, though.
- Chinese Mobile Games and Entertainment was bought by a Chinese auto group for $1 billion.
- Publisher Shanda Games was bought by a Chinese textile company for $1.9 billion.
- Developer Funplus sold $1 billion of assets to a Chinese building company.
- Publisher Youzu was bought for $600 million by a Chinese umbrella company.
- Publisher WuShen was bought by a Chinese glass manufacturer for $150 million
It’s the juxtaposition of the industries involved that generates the surprise.
And, to be fair, when chicken meat manufacturer Leyou Technologies Holdings Limited says it’s diversifying its operations because the “harsh operational environment in the PRC” mean the management of the group only has “limited control of the business results”, you do wonder how much they know about the incredible competition and lack of control most games developers suffer from.
On the other hand, Leyou can prove its business strategy is paying off.
In 2015, it generated 80% of its revenue from chickens and 70% of its profits from games thanks to its investment in Digital Extremes. Maybe it's easier to make money from games than chickens.
Equally, since Leyou completed the acquisition of Digital Extremes and Splash Damage in July 2016, its share price is up 60%.
Making games is not a cash intensive business but it can be high margin.
In a not dissimilar way to how cash from three Florida dentists kickstarted Amiga, cash (from its chicken business) is now fuelling Leyou’s profits (from games).
There are two reasons why when this type of conglomeration works, it can work well.
Making games is not a cash intensive business in terms of operations. You rent an office, you hire staff and you buy some computers.
Running a chicken farm, operating a mine and building office blocks are all much more expensive and at best low margin businesses. In contrast, as the figures for Splash Damage - a relatively small developer - show, it generated profits of $7.5 million on $20 million of revenue. That’s a 38% margin.
It should also be pointed out that the mark of many Chinese game acquisitions appears to be a hands-off approach.
The best example of this is Tencent, which has major equity stakes in game companies ranging from League of Legends developer Riot Games, to Unreal developer Epic Games, Glu Mobile, Pocket Gems, Netmarble, and, most notably, Supercell.
In none of these cases do we hear about interference in the businesses. Indeed, Tencent has invested in so many technology companies, it would be virtually impossible for it to be actively engaged in their day-to-day business.
Whether the myriad of Chinese manufacturers and building suppliers will be as moderate as tech giant Tencent remains to be seen, of course. When businessmen start losing money, they like to make big decisions, and the further the geographical distance, the easier it is to cut jobs and write-down investments.
It’s also the case that some of the recent Chinese acquisitions have been of what could be described as troubled game companies.
Despite the seemingly large $300 million price tag, Jagex had lost its way in recent years, as had German browser game publisher Bigpoint, which was picked up by Youzu for $90 million. Things would have had to change at such companies, whether they had been acquired or not.
When businessmen start losing money, they like to make big decisions.
Still, as the travails of another German browser developer Goodgame Studios show, dealing with a transition to F2P mobile games is a tricky situation even experienced management can screw up.
And on this basis, it would be wise for commentators, especially Western ones, to think more widely about the potential for any business acquisitions to go horribly wrong if and when some of these deals go sour.
From the infamous $165 billion AOL-Time Warner merger in 2000, to more recent disasters such as HP’s $11 billion Autonomy acquisition and News Corp’s MySpace deal, and not to forget the billions of dollars wasted when Japanese mobile platforms DeNA and GREE rationally expanded into the West, it doesn’t take a chemical company buying a talking cat app to mess up a business.
Which is lucky, because given the continuing strength of the Chinese economy and the maturing of the Western mobile games markets, there will be plenty more such deals raising some people’s eyebrows in 2017.
Cock-a-doodle-do, and a very happy year of the Rooster to you all.