Throughout the past 18 months, real-life experiences have been on hold for most of us. Adventures have been few and far between - apart from in the virtual world of course. Through gaming, millions of people are able to connect with other people, travel the world (or even the universe) and escape from the mundane for a while. It’s no surprise then, that gaming is one of those rare things: an industry that enjoyed increased sales during 2020.
Alongside these increased sales came a booming M&A market during, which has continued into 2021, with record deal figures emerging in the first quarter. For the first three months of 2021, some 280 deals were announced and closed, valued at a total of US$39bn.
Gaming and lockdown - the perfect partners
Staying at home and gaming has become a regular pastime for so many people all over the world. Let’s face it, if you’re ordered by law to stay in your house as much as possible, spending a bit more money than usual on some decent games for your phone, tablet, PC or console is a no-brainer.
The average iPhone user in the US spent US$76.80 on games in 2020, up by more than 40% on the average spend the year before the pandemic hit. Puzzle games were the biggest hit, accounting for more than $15 of the annual spend for average iPhone users. But this is just the tip of the iceberg, as gaming of all kinds enjoyed a stellar year.
Sports games, for example, have enjoyed increased popularity, as popular real-life sports like football were being played without audiences for entire seasons. Fans turned their attention to gaming instead and giants like Sony and Microsoft, who make gaming consoles, as well as tech giants Google and Amazon, have been working hard to finalise rights deals with notable players.
In the UK, gaming has reached new audiences, with the overall reach increasing by 63%. The market overall, was worth GB£5.3bn in 2020, up from GB£4.8bn the year before, which represents a remarkable jump in value. This had the expected knock-on effect for the M&A market, with UK gaming developers attracting huge sums from strategic investors. It’s a seller’s market and developers are well-positioned to benefit from the increased appetite for gaming.
What impact has the pandemic had on gaming M&A?
UK gaming companies have been attracting serious offers over the past few months from investors keen to cash in on the growing appetite for gaming. Some technology businesses outside the sector are looking to gaming to diversify and boost profits as they emerge from the pandemic and are keen to use M&A to reach their goals.
Larger tech businesses have been on the lookout for smaller developers to add to their enterprises and help them grab a slice of the lucrative gaming pie.
According to the latest DDM Games Investment Review, although 2020 was a record year for gaming M&A, the first half of 2021 has already wiped this record out. In fact, the figures show that M&A values in the gaming industry in the first half of 2021 are double that of the entirety of 2020. Strategic buyers are paying out more and more for smaller developers that they hope will help them to take advantage of the growing marketplace for gaming - and especially mobile gaming.
An example of this is the recent purchase of Sheffield-based developer Sumo for 13x its most recently reported revenue of £68.9 million . It was purchased by Chinese tech firm Tencent for GB£919mn. The deal followed Tencent’s acquisition of a minority stake in Sumo back in 2019, which it extended to a full takeover in July 2021.
[i]Sumo started out in 2003, working for the likes of Microsoft, Sony and Sega, but it soon became the sole developer of a number of high profile games and franchises. It now employs some 1,200 people across 14 UK and international locations.
The firm’s revenues have soared alongside its success, rising by more than 40% between 2019 and 2020 alone - another beneficiary of the lockdown and its impact on gaming. Profits for the business rose more than 30% to GB£31.5mn in 2020.
Sumo’s CEO and co-founder Carl Cavers commented: “The opportunity to work with Tencent is one we just couldn’t miss. It would bring another dimension to Sumo, presenting opportunities for us to truly stamp our mark on this amazing industry, in ways which have previously been out of reach.”
Earlier in 2021, Phoenix Games, a Belgium-based games studio that specialises in match-three style games, bought UK developer SmileyGamer, for an undisclosed sum. However, it is known that SmileyGamer had a revenue of just £5m in its most recently filed accounts. The acquisition is part of Phoenix Games’s strategy of investing in and acquiring complementary mid-sized studios developing free-to-play games to add to its offering and extend its reach. It helps them to monetize their games and ‘overcome industry barriers’.
CEO of Phoenix Games, Klaas Kersting, commented: "As with most of the studios we partner with, we saw a great opportunity to continue giving [SmileyGamer] the freedom to develop great games, but applying our operational knowhow to improve monetisation. We're excited to announce this at an important time for us, as we continue to grow and move into a new chapter, following the recent rebrand."
Phoenix Games has acquired several other studios, including UK based Well Played Games, over the past few years. In June 2021, it announced the purchase of a minority stake in Leamington Spa based mobile games developer Midoki, in a move that is intended to help it develop its Knighthood game. It seems plausible that a full acquisition could be on the cards further down the line.
As we move out of the COVID years and into a new technological era for gaming, tech businesses and developers are right to be feeling positive about the future. While we will (hopefully) enjoy greater freedoms in the coming months, allowing us to experience adventures ‘IRL’, many of the people who have started gaming for the first time during the pandemic will continue to be gamers. This is especially the case for those who have discovered mobile gaming, virtual reality gaming and other more recent additions to the marketplace.
Growing developers based in the UK will continue to be targets for larger tech firms, and they can expect to attract generous offers from companies willing to invest in smaller rivals with the right talent, tech and reputation.
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