Why has the pandemic accelerated gaming M&A?

Since the beginning of the year, there have been a huge amount of mergers and acquisitions (M&A) in the gaming space. It seems like every week there’s a big deal being announced in fact, and if it isn’t a deal it’s a studio expansion or creation of a business outreach division.

Without a doubt, gaming companies are making a huge push to reach new territories right now – whether that’s a physical territory like a new country, or a business territory by joining forces with another studio. The numbers reflect that: in just the first quarter of 2020, M&A deals totalled $1.6 billion, compared to just $1 billion in the whole first half of 2019.

Let’s take a look at a couple of key examples:

AppLovin acquired MachineZone

Image from AppLovin

In May the mobile ads company AppLovin announced their acquisition of the mobile game behemoth MachineZone, famous for wild financial successes like Game of War: Fire Age and Mobile Strike. The predicted paid price was around $500 million.

Pre-Covid, AppLovin was eying an IPO (going public) to raise $1B in 2020. Their goal is to boost overall revenue prior to that. With the backing of KKR, a $100B private equity firm who owns 20% of AppLovin, the company essentially has access to infinite capital to acquire businesses. All with the aim of boosting their top line revenue and putting them in a strong position ahead of their IPO.

After all, investors invest in the future. Ahead of their IPO, Applovin needs to show growth potential which is why they are positioning themselves as a true mobile company. 

Their growth as a pure monetisation platform is capped due to lower margins and not owning the audience they advertise to. Instead, by integrating vertically with studios, they are building a portfolio of apps gathering 350M DAU. Plus, while much smaller in market cap, they’re directly competing for advertiser’s dollars with tech giants Facebook and Google by owning the mobile gaming experience.

So why MachineZone?

• They have high retention games with some of the most profitable revenue per user around
• A talented team skilled at user acquisition to bolster AppLovin’s internal skills and resources
• It’s an absolute steal – MachineZone’s last financial round valued them at $5 billion!

Zynga Acquired Peak

Image from VentureBeat

This month, Zynga made the largest acquisition in its history by acquiring Peak Games for a whopping $1.8 billion. They split this into $900 million dollars cash and $900 million in stocks as an incentive to keep Peak’s employees on board.

Considering Peak Game’s key hits Toy Blast and Toon Blast have 12 million daily active users between them, the price is pretty fair for a lot of reasons.

If you wanted to approach this from a pure numbers standpoint, this acquisition is predicted to boost Zynga’s daily active users by 60% which will aggressively accelerate their income.

Moreover, the Match 3 puzzle game genre is a $3.5 billion industry and growing fast, but Zynga is weak on it. Instead of building these capabilities from scratch, it makes sense acquiring a successful studio in the space to get a head start. Zynga knows Peak well as they have acquired their casual cards game studio for $100 million back in 2017.

Are all these M&As linked to quarantine?

While negotiation of these deals probably began before Covid, quarantine almost definitely sped them up.

We’ve heard people discussing the idea that companies need to come together to have financial security during these tough times. For any other industry that might be the case, but our industry is booming right now.

And that makes sense. Video games are kind of crisis proof because when times are at their worst and people are separated, video games bring them back together. When you’re stuck at home with nothing to do, games are there for you. In fact, there are more casual ‘time filler’ gamers than core now.

We’d even go so far as to say that video games are the new social platforms, which you can see evidence for in social mobile game usage going up during quarantine AND in large scale events like Travis Scott x Fortnite.

Financially, now is the perfect time for games companies to acquire smaller players to consolidate their portfolio and compete.

Travis Scott’s Astronomical event

Strategic benefits of M&As right now

This is where the gold is. With profits booming, business expansion is a no brainer for a lot of big players but what does that actually mean? Why do it?

Boiling down a long list of benefits to the few core ones:

• It allows them to acquire new users.
• It allows them to acquire new game genres instead of hiring expertise
• They can combine skills and resources, both as developers and marketers.

The last point is a killer. As DoF explains, over the past few years marketing / user acquisition has proven more and more important to have a successful game. For hypercasual titles, optimisation of creatives and audiences to up the rate of Installs per Thousand impressions and speed up payback times is equally as important as good gameplay and retention mechanics.

This is why AppLovin acquiring studios makes total sense, as they can mix their expertise to better compete in the market. 

To further that last point, acquiring the users of other studios generates a powerful network effect too: every new user adds value to the network for the studio by providing more data to optimise user acquisition, and inventory. Each new user increases the perceived value of the game because a larger user base must mean a better game, right? 

Acquiring these studios also means acquiring networks of social groups. Friends play what their friends play, which skyrockets a game’s userbase (and so revenue) exponentially.

In short, when you stop thinking of these as investments in games and start thinking of them as investments in the future of digital social media, these M&As make more and more sense.

What all of these mergers have in common is how much they show that gaming is the new mainstream universal love, and businesses are striking while the iron is hot.

So what comes next?

More acquisitions, more mergers, and more unique games that people love to play together. 

The social gaming space on mobile will continue to expand, and talented devs and studios in this space are going to be sought after to define the future of social interaction in a digital world. Expect more mergers, more acquisitions, and more studios making the most of this surge in newly engaged players.