10 mobile game M&A deals that probably won't happen but which maybe should

Joining the dollar dots

Given the $8.6 billion Tencent-Supercell and $5.9 billion Activision Blizzard-King deals which completed during the last 12 months, it’s little surprise 2016 was a record for mobile game-related mergers and acquisitions (M&A).

2017 may not reach that level in terms of billions of dollars, but it’s already seen some interesting deals, notably:

• the closing of Netmarble’s rumoured $700 - $800 million acquisition of parts of Kabam,
• Take-Two’s $250 million purchase of Social Point, and even
• Zynga’s secretive $42.5 million takeover of Harpan.

So, in the context of a fast-maturing Western market and some fast-expanding Asian companies looking for international reach, who’s next?

Match-making

We may not have a crystal ball but we have attempted to match 10 companies who could be buyers with 10 companies who could be available… at the right price.

Not that we’re saying these deals could happen, merely that these are deals which make sense in some way and which also highlight deeper trends driving sector consolidation.

N.B. The list is organised in increasing estimated deal size.

Click here to view the list »

• 1 Supercell buys Seriously

  

  Estimated Deal Size: $100 million
  Pros: Supercell gains great team and strong IP and has the resources to scale success
  Cons: Would Best Fiends appeal to Supercell’s players?

  Having already taken a 51% stake in fellow Finnish developer Frogmind, we know Supercell continues to look at acquisition opportunities.

  Finnish/US operation Seriously is the obvious next step.

  Near neighbours

  Founded by ex-Rovio, Fox and Supercell staff, Seriously has built a strong company culture, especially innovating in terms of its marketing, and taken its casual Best Fiends games into the top grossing charts, especially in the US.

  Sales of around $40 million annually suggest an acquisition price in the order of $100 million, although given its growth and $28 million in VC cash, the total could be pushed higher.

  Supercell has the cash, of course, although it might look to structure any deal with a strong performance earn-out element as its - and Tencent’s - resources are brought to bear on making Best Fiends a truly global brand.

  
  

• 2 Amazon buys Super Evil Megacorp

  

  Estimated Deal Size: $150 million
  Pros: Amazon gets a leading mobile eSport developer
  Cons: High cost within an unproven sector

  There’s plenty of smoke and mirrors concerning how big - and profitable - the eSports market is, how big - and profitable - it could be, and whether mobile games will have a significant role to play.

  Amazon already has plenty of skin in this game, of course, thanks to its $970 million acquisition of Twitch back in 2014.

  It’s also supporting streaming in its Lumberyard development engine, spending marketing dollars on existing eSports tournaments - including Vainglory - and even trialled own casual mobile game event, the Champions of Fire Invitational.

  In this context, getting its hands on US developer Super Evil Megacorp would make sense.

  Meeting of minds

  Its MOBA game Vainglory has the greatest traction within the eSports ecosystem.

  And more than the title itself, the company now has years of experience in running physical events globally and meshing such activity within a live game.

  Perhaps the biggest issue in this proposed deal would be finding the right price.

  Super Evil Megacorp has raised $41 million in funding, and given the nature and uncertainty of the sector, its investors would be looking for a big multiple payoff. Similarly, Amazon would be wary of overpaying for a company which, while it has presence, does not report its financials publicly, making it difficult to gauge from the outside the company's success in terms of its revenues.

  Timing could also be an issue. Ironically, if mobile eSports clearly gains more traction in 2017, a high price works for both sides. If not, the sector could quickly deflate.

  
  

• 3 Take-Two buys Plarium

  

  Estimated Deal Size: $200 million
  Pros: Gains experienced core studio for licence exploitation
  Cons: Its recent games haven’t been successful

  Despite its $250 million acquisition of casual game-focused Social Point in early 2017, Take-Two's games resonate more closely with Israeli core gaming outfit Plarium.

  Its initial success came from games on Facebook as well as Russian social networks VK and OK, but 4X titles such as Stormfall: Rise of Balur and Vikings: War of Clans have demonstrated solid grossing performance on iOS and Android.

  Indeed, with most of its development studios in Russia and Ukraine, Plarium has particularly strong traction in Eastern Europe.

  However, more recent releases such as Soldiers Inc. and Gates of War haven’t been successful.

  Another bow string

  Adding Plarium to its stable alongside Social Point could be highly complementary for Take-Two. There would also be clear potential licence tie-ins with mobile F2P versions of Red Dead and Borderlands, although whether a GTA 4X mobile game would pass Rockstar muster remains unclear.

  Given the lack of data about Plarium’s revenues, pricing such a deal is difficult. Its games have performed well, but it doesn’t have any global successes like MZ, while its occasional release of casual games - film licence Rio: Match 3 Party - suggests some corporate confusion.

  Similarly, the mobile market is only getting more competitive, which will squeeze ongoing profitability.

  Nevertheless, Take-Two has the cash and there would be plenty of upside for a generous performance earn-out.

  
  

• 4 Zynga buys Scopely

  

  Estimated Deal Size: $250 million
  Pros: Good match of complementary products especially casual multiplayer
  Cons: Valuation would be a tough negotiation

  Over recent years, Zynga has been quiet but active in the M&A market, spending well over $100 million acquiring Rising Tide, Zindagi, Puzzle Social and, most recently, Solitaire specialist Harpan.

  In that context, a much larger deal to buy US developer Scopely might seem out-of-character and more akin to 2014’s NaturalMotion deal.

  Friends With Buddies

  Yet, Zynga still has $850 million in cash and, as well as being solidly accretive to sales, a Scopely deal would give Zynga access to Scopely's portfolio of With Buddies games that would chime with its With Friends games.

  Even core games such as The Walking Dead: Road to Survival and WWE Champions: Puzzle RPG would fit into Zynga’s Action Strategy category.

  Price would definitely be a sticking point, though.

  Scopely has raised $100 million in VC funds - $55 million in 2016 - and so would likely hold out for a much higher valuation.

  Still, with 2017 looking like it could offer the first signs of a Zynga turnaround, there’s the opportunity for a higher valuation, thanks to the addition of a chunk of Zynga’s stock.

  
  

• 5 Jam City buys Glu Mobile

  

  Estimated Deal Size: $350 million
  Pros: Cheap way to acquire revenue and some solidly performing casual games
  Cons: Would confuse a possible IPO and funding such a deal is uncertain

  The rebranded SGN, Jam City recently hit the headlines with the acquisition of US developer TinyCo for an undisclosed sum in 2016. That deal added the likes of Family Guy: The Quest for Stuff and Marvel Avengers Academy to Jam City’s portfolio of casual match games.

  So as it gears up for a possible IPO, buying a troubled company like Glu Mobile may seem an odd move. Yet there is logic.

  Bulking up

  Additional scale is the most obvious. Given Glu’s long-term losses as a standalone company on the NASDAQ exchange (GLUU), gaining its $200 million of annual revenue would be relatively cheap.

  With a market cap of around $300 million, a premium of 20% would value Glu at $360 million.

  Glu also has plenty of games - Covet Fashion, Design Home, Cooking Dash - that would chime with Jam City’s casual audience.

  Whether Jam City could do anything new with Glu’s celebrity games like Kim Kardashian: Hollywood seems unlikely, though, and games like Deer Hunter and Racing Rivals might be a mismatch.

  Perhaps the most tricky part of such as deal, however, would be funding.

  Jam City would have to raise the cash via debt or engineer some sort of share swap which would complicate its IPO.

  Another sticking point is that Tencent is also a big Glu shareholder. Still, perhaps it could fund the deal on the promise of future Jam City shares - the ultimate jam tomorrow deal?

  
  

• 6 EA buys Rovio

  

  Estimated Deal Size: $400 million
  Pros: Would boost EA Mobile sales by 30% as well as providing non-mobile potential
  Cons: Expensive in terms of Rovio's profitability

  Following a couple of bad years dealing with the over-expansion of Angry Birds’  licensing and merchandising activities, Rovio is back on track as a successful mobile game developer.

  Annual sales were around $200 million for 2016 and with a sub-10% profit margin, the Finnish developer is now in play as an acquisition priced around the $400 million mark.

  What's next?

  Of course, it’s now trying to expand beyond being just the home of Angry Birds, but standing out in a crowded market is becoming harder, making this the right time to hook up with a big partner, especially one that would enable it to successfully take the Angry Birds universe outside mobile.

  The obvious candidate is EA.

  Its $732 million deal for PopCap in 2011 (quoted at the time as $750 million) was overpriced.

  But with a strong share price and $2.4 billion in cash, buying Rovio would make sense, both in terms of boosting an already growing EA Mobile as well as adding to wider growth potential.

  
  

• 7 Netmarble buys Gamevil and Com2uS

  

  Estimated Deal Size: $2.5 billion
  Pros: Netmarble would gain a lot of international sales, notably via Summoners War
  Cons: Shareholder agreement would be tricky

  Backed by Tencent (22%) and Korean entertainment giant CJ E&M (28%), mobile game outfit Netmarble is looking to raise up to $2.4 billion when it floats on the South Korean stock exchange later in 2017.

  That would value the entire company at $12 billion or twice as large as GTA publisher Take-Two.

  Netmarble is clearly in the market for more acquisitions too. It’s already spend the thick edge of $1 billion on Kabam’s Vancouver studio (including Marvel: Contest of Champions), so what’s next?

  One interesting move would be consolidation at the top of the Korean mobile games market. Com2uS is the second largest such outfit. Floated on the KOSDAQ, its market value is around $1.5 billion.

  Local tie-up

  Buying Com2uS would gain Netmarble Summoners War, which has almost clocked up $1 billion in lifetime sales.

  Significantly, the RPG is a global hit with revenue evenly generated from North America, Europe and APAC. That would be very valuable for Netmarble, which despite the Kabam deal, remains skewed towards the Korean market.

  However, buying Com2uS isn’t as simple as paying a premium to shareholders.

  Com2uS is controlled by fellow Korean mobile game publisher Gamevil. Also floated on the KOSDAQ, it’s currently worth around $400 million, and like Com2uS, has a decent global spread of sales, including North America.

  Could such a deal happen?

  In terms of funding, yes. A 40% premium to Com2uS and Gamevil’s share price would give a total deal value of $2.5 billion. Netmarble could raise that through cash, debt and shares if it so desired.

  Shareholder agreement, notably of Gamevil’s management, would be crucial, however, to actually creating a $15 billion mobile gaming behemoth.

  
  

• 8 NetEase buys Zynga

  

  Estimated Deal Size: $3 billion
  Pros: Gains Western-focused business
  Cons: Mark Pincus’ control means it couldn’t be a hostile takeover

  Following its record-breaking 2016, Chinese gaming outfit NetEase is looking to expand its highly successful domestic mobile games business internationally.

  Unlike rival Tencent, it’s not yet been active on the M&A front but making a move on US outfit Zynga would certainly see it hitting the headlines.

  With Zynga’s share price sub-$3, the company is worth around $2.4 billion and even taking into account a 20% premium, NetEase could fund $3 billion from its $5.3 billion cash reserves.

  Walking the dog

  For the price, NetEase would acquire a strong and highly profitable social casino business and a growing ad-funded casual games portfolio. As well as Words With Friends, Zynga’s just launched Boogle With Friends and Crosswords With Friends (soft launch) and spent $42.5 million on some Solitaire titles.

  Games more in keeping the core titles that have built NetEase’s scale include Empires & Allies and CSR Racing 2, while perhaps even Dawn of Titans could be revamped and localised for Chinese tastes.

  More significantly, Zynga’s presence in North America and Europe would give NetEase the international foothold it desires, while $750 million in annual sales, including $200 million from advertising (NetEase also has a strong advertising division), would be over 25% accretive to its mobile game sales.

  However, as with all things Zynga there’s one big stumbling block: Mark Pincus’ 70% control of Zynga voting stock. Unless he agreed with the deal, it would be a no deal.

  
  

• 9 Nintendo buys DeNA

  Estimated Deal Size: $4 billion
  Pros: Would provide opportunities for Nintendo to shake up its entire business
  Cons: Does a company as traditional as Nintendo care?

  Nintendo’s mobile strategy poses more questions than answers, but that doesn’t mean it couldn’t (shouldn’t) make a big move to ensure mobile games are a key part of its ongoing business, no matter how well (or badly) Switch does.

  Formalising its strategic partnership with Japanese mobile publisher DeNA would be the most obvious solution. Under the current deal, DeNA handles the free-to-play game design and live operations of titles such as Super Mario Run and Fire Emblem Heroes and gets a revenue cut.

  The real switch

  Yet given its troubled international expansion and subsequent restructuring, DeNA would be a fairly cheap acquisition for Nintendo. With a current market value of just over $3 billion, even a 30% premium would value it at $4 billion.

  In contrast, Nintendo has a market cap of $33 billion and around $6 billion in cash so a deal would be easy to engineer and welcomed by DeNA shareholders, especially if it included stock.

  As well as bringing F2P game design and operations in-house, the move would also provide the opportunity to shake up Nintendo’s notoriously traditional approach to digital retailing.

  All of DeNA’s game sales are digital, and it’s also experimenting in new business areas ranging from health to travel, automotive and banking. Getting Nintendo’s input and investment into these would be transformative.

  However, with its focus set on its new console launch, the only way Nintendo is likely to think about such opportunities would be in the event Switch shapes up to be a failure of Wii U proportions, which until its first 10 million sales remains as possibility.

  
  

• 10 X or Y buys MZ

  

  Estimated Deal Size: +$10 billion
  Pros: Is MZ a successful mobile game developer or an innovative data processing outfit?
  Cons: Is MZ a successful mobile game developer or an innovative data processing outfit?

  Best known for the aggressive marketing for its mobile games Mobile Strike and Game of War, there soon might be much more to US developer MZ.

  To highlight its new big data technology, it’s launched a $1 million competition for developers to make the best useful of real-time data feeds on its Satori platform.

  Satori is the commercialised version of the infrastructure MZ uses for its games.

  Two-way street

  For that reason, valuing MZ is a tricky proposition.

  As a pure gaming play, the billion plus dollars annually generated each by Mobile Strike and Game of War place MZ into a deal scale that’s already Supercell-sized. In that context, there are very few game companies with the ability or appetite to engineer such an acquisition.

  However, if Satori’s potential looks like being fulfilled, MZ’s value explodes as does the size of companies that might be interested in acquiring it.

  For example, IBM, Oracle and Cisco are all worth over $150 billion, while our old friend Tencent is worth closer to $300 billion. Any, all or more of them could be interested.

  
  

• 11 A note on valuations

  While some beancounters in the financial community will tell you there are strict parameters for valuing a company - five times profits, etc - the truth is once a company decides it’s interested in a deal, it can agree to almost any price tag, especially when viewed retrospectively.

  The main reason for this elasticity is timing.

  The most valuable companies are those who are growing quickly in a market that’s also growing quickly. Both vectors make it almost impossible to calculate how profitable they will be in future.

  Risky business

  For, in this aspect, the beancounters are correct. Fundamental company valuation is based on profitability, hence the common use of share price to earnings (P/E ratio) as a basic comparative amongst share pickers.

  Yet, even within such constraints, recent game deals have seen incredible spread from the six times profits Activision Blizzard paid for King, to the nine times Tencent paid for Supercell, to the 20 times Microsoft paid for Mojang.

  The bottom line is, once the chase is on, every deal has its own dynamic, something we’ve attempted to reflect in the nominal valuations, and possible structure in terms of cash, equity and earn-out postulated in this article.

  None should be treated as being the result of deep financial analysis or inside knowledge, however.