Opinion: Why ngmoco is worth the $195 million DeNA might actually pay for it

Stripping out $208 million of share and accounting value

Opinion: Why ngmoco is worth the $195 million DeNA might actually pay for it
The value of a company has the ring about it much like how long is a piece of string?

It's a question that's been thrown into sharp focus however in the case of US game publisher and technology provider ngmoco, which has been bought by Japanese social publisher DeNA for a headline figure of $403 million.

For those people who buy and sell whole companies or shares of companies on a daily basis - there are some standard tools for measuring how much a company might actually be worth.

Show me the money

Most straightforward are the P/E ratios of publicly listed companies, which measure their share price to earnings - the higher the ratio, the more expensive their stock is - hence allowing the value of similar companies to be compared.

In such a manner, Apple has a P/E ratio of 27 while Nokia is 30, Google is 23, Microsoft is 12 and Yahoo! is 26. Hmm.... Perhaps not so useful.

Another problem with P/Es are they are somewhat self selecting in that publicly owned companies are generally large, have a steady trading history, and are highly transparent in terms of the financial data they provide. Even in these cases, the P/E ratio only really work if a company is profitable.

Enterprise value

In terms of smaller, newer companies such as ngmoco, valuations are much harder to make, if only because the early years of start ups are highly volatile in terms of revenue and profits (and losses). It's particularly the case with ngmoco, which was heavily funded by venture capitalists - to the tune of $40 million.

This situation makes it even harder to judge how a company is performing as it can invest heavily and endure heavy losses, whether it's heading in the right direction or not.

Indeed, it's clear from figures released by DeNA that ngmoco had spent around $7 - 8 million by the time it decided to completely change its business model in mid 2009 from selling expensive premium games to giving away games for free and hoping users would buy virtual items to make their experience more enjoyable.

That's one expensive learning curve.

Show me the profits

The other ways of valuing a company involve working off multiples of its revenue or profits. This tends to be used for small companies operating in steady markets.

Of course, revenue by itself isn't valuable as companies can have high revenue and high losses. Certain companies - perhaps longterm badly run family operations that now can be sweated for profits - could be sold at up to twice revenues. But, as we've seen with public companies, even in this case it's much better to work off historic profits, with a conservative rule of thumb valuation being five times profits.

Fundamentally though, for money managers, the value of any company eventually boils down how much money they can make investing it in compared to the other things they can do with their money, whether that be buying gold, investing in a feature film, buying government stocks, property or just putting it all in the bank.

Technically, this doesn't help us in the case of ngmoco however, as in the two years of operations for which numbers have been released, it was heavily loss making.

In 2008, it had losses of $2.46 million on revenues of $484,000.

In 2009, it had losses of $10.89 million on revenues of $3.16 million.


2010 revenues have been estimated at around $30 million, with the assumption that the company was likely month on month profitable at the time of the DeNA deal. Peak revenues of $120,000 per day have also been banded around by developers, who may or may not have an inside track on the situation.

Show me the future

But no. When it comes to ngmoco, the most important figure in its valuation was the money that investors such as Kleiner Perkins Caufield & Byers, Institutional Venture Partners and Norwest Venture Partners had invested in the company.

Clearly such hardnosed VCs are only interested in making a profit on their investment so considering they had invested $40 million into ngmoco to date, they would be looking for a $200+ million valuation on the company.

Looking wider afield, there are parallels in the social gaming market that suggest some sort of valuation of companies like ngmoco.

Indeed, DeNA itself is looking to post financial figures in 2010 of $1 billion in revenue and around $500 million in profit, providing a back of the paper 50 percent margin. It's a similar situation with Facebook social giant Zygna, which though tight lipped when it comes to exact figures, is thought to operate on a similar profit margin.

So, ensuing arguments about whether such margins are sustainable in the longterm, or whether they should be used for mobile social games companies, it's not inconceivable that ngmoco could notionally be generating tens of millions of dollars of profit in future years, providing - an again notional - hundred(s) of million of dollar valuation.

Money for nothing

Approaching the deal from the other direction, it's also worth considering how much, and indeed how, DeNA is paying for its purchase.

While the headline figure is $403 million, $100 million of this consists of money that is dependent on ngmoco's 2011 operations. The breakdown of this is $56 million in cash, $31 million in common stock and $12 million in warrants.

Cash aside, this then should be stripped out of the purchase price as it's not due for payment now, and maybe never paid. (Even if it is paid out, ngmoco will be highly profitable by that point, so it won't cost DeNA $100 million anyhow.)

In terms of the remaining $303 million, this is split into $128 million of cash, $146 million of shares and $27 million in warrants (effectively the option to buy shares at a fixed future price).

Cash is obviously the most important part of this as dollars are always worth their value. Ngmoco's shareholders can immediately spend this amount, and conversely DeNA can't spend this amount on other operations. That said, DeNA has around $400 million in terms of cash just sitting in its bank account, doing nothing, so it's hardly dipping into its overdraft. But, cash is cash so this has to be part of the real valuation.

And shares for free

Shares in DeNA are a different manner however, as the price of shares goes up and down over time, and - in this case - DeNA is also issuing 5 million more shares (worth around $135 million) to cover this part of the deal.

All warrants and the shares due from the earnout will be covered by what DeNA calls its 'treasury stocks', so effectively free.

Hence, much like a national bank printing more money to cover government debt, the cost of this shouldn't be viewed as the nominal value of DeNA's shares now, even though issuing more shares will dilute current investors and presumably provide some downward pressure on DeNA's share price should the deal not work and ngmoco not hit massive profitability.

Effectively then DeNA is getting the most of the shares and warrant element of its purchase for free.

Getting to the truth

In this way, it's apparent that the headline purchase figure of $403 million can be reduced in terms of the cost of the deal to DeNA now, perhaps as low as $195 million - the $128 million cash due now, and $56 million due post 2011, and some share value - which as we've seen also roughly the magic figure in terms of being the valuation at which ngmoco's investors would be looking to sell.

Of course, they have also received a further $208 million in DeNA shares, which could be worth face value and considerably more in future, but this hasn't cost DeNA very much at all.

QED: Both parties are happy with the deal, and a company that over its short lifetime has made a loss of $14 million can be sold in a deal that accountants (and headline writers) value at $403 million.

[Source: DeNA (PDF), PGbiz, MobileEnt.biz]

Contributing Editor

A Pocket Gamer co-founder, Jon is Contributing Editor at PG.biz which means he acts like a slightly confused uncle who's forgotten where he's left his glasses. As well as letters and cameras, he likes imaginary numbers and legumes.