Wednesday, 18 April 2012

Q1 Transaction Update of Global Games Investment Review 2012: ConsolidationVille accelerates

(This article first published on AllThingsD, People's Daily (China), GamesBeat, GamesIndustry International and Gamasutra in late April 2012)

Digital investment bank Digi-Capital has just published the Q1 Transaction Update of our Global Games Investment Review 2012 (available at

As anticipated in our Global Games Investment Review published earlier in the year, 2012 is proving to be a year for strong consolidation and investment across the games market. Although we only have one Quarter of data for 2012, trends are emerging compared to 2011.

The consolidation we anticipated in Social Games 1.0 has begun, and we are seeing substantial dealflow (both completed and in progress) of social games companies looking to sell themselves through the course of 2012. If the number of investors and management teams asking for our help is an indication, there could be major consolidation this year.

When you look at our Review, there are compelling reasons why this is happening. We think of total Daily Active Users (“DAU”) as a general proxy for revenue, and average DAU per game as a general proxy for profitability for social games companies. While this is open to interpretation, our comparison of the top 50 Facebook games companies below (see this chart with individual companies named in the full Review) indicates that some social games companies continue to do well in terms of revenue, profitability or both (e.g. Zynga, Wooga, King, EA, Peak Games). However our analysis also indicates that many social games companies might be struggling on one or both measures, which could be the catalyst driving consolidation in the sector.

We think it is possible that the Zynga/OMGPOP $180M transaction could change some of the operational investment dynamics in the Social games sector, with well funded competitors investing heavily to try to manufacture a hit in the hope of being acquired at a high valuation. While this could work, a hit driven operational investment approach is not without risk. Other competitors are taking a measured operational approach to building strong portfolios of games for sustainable growth, and we continue to admire King, Wooga, Peak and others in this regard.

Facebook games developer total games portfolio DAU(M)
vs average DAU(M) per game

* As at April 13th 2012

Social gambling (driven by hopes of US regulatory change) has emerged as a driving force for social games M&A, with the IGT/Double Down Interactive $500M transaction and the second half of the Caesars-Harrah’s/Playtika Est $90M transaction accounting for a large chunk of recent social games M&A. Unsurprisingly, we are seeing a lot of dealflow in this space. 

As detailed in the full Review, 2011 was a record year for games M&A with 113 transactions generating $3.4B transaction value at an average transaction value of $30M. In Q1 2012, 30 transactions generated $1.7B transaction value at an average of $57M (although these figures include the $740M take-private of Shanda and exclude the $450M value of Disney’s acquisition of UTV which owns Indiagames). So 2012 could be shaping up as a bumper year for games M&A. In Q1 2012, MMO, Social/Casual and Mobile dominated, and we anticipate that this trend could continue through 2012. All M&A transactions across sectors are detailed in the full Review. 

Global Games M&A Q1 2012

As detailed in the full Review, 2011 was also a record year for games investment with 152 transactions generating $2B transaction value at an average transaction value of $13M. In Q1 2012, 38 transactions generated $248M transaction value at an average of $7M. Comparing Q1 2012 to the average quarterly rate of investment for 2011, there appears to be flat transaction volume but a decline of 50% by total and average transaction value. In Q1 2012, Mobile and MMO dominated, but the change which could account for the decline in average transaction value comes from Social/Casual. In 2011 Social/Casual accounted for 57% of transaction value and 32% of transaction volume, but in Q1 2012 it accounted for 3% of transaction value and 16% of transaction volume. So our view that Social Games 1.0 is in consolidation mode could continue to be an ongoing trend through 2012, as the VC market appears to have slowed down its frenetic pace of social games investment from 2011. 

Again as we anticipated, mobile accounted for 30% by transaction value and 39% by transaction volume, and mobile (mobile-social in particular) could continue to be a driving force for games investment through 2012. The success of free-to-play seems to be attracting investors to MMO, accounting for 43% of transaction value and 21% of transaction volume. The strongest Chinese and South Korean companies we work with are actively looking to acquire and invest in mobile, social-mobile and free-to-play MMO both for domestic markets and as international growth platforms, and we anticipate they could continue to be strong investors and consolidators in these sectors. All investment transactions across sectors are detailed in the full Review.

Global Games Private Placement Q1 2012

We have updated our analysis on consolidation across games sectors (see chart below), as we now see Social/Casual as having moved from Growth into a combination of Growth and Consolidation, and Client-Based MMO as having moved from Consolidation to a combination of Growth and Consolidation. The welcome change towards growth in MMO is due to the success of free-to-play MMO companies like Nexon (with a $1.2B IPO), as well as new sector entrants discussed in the full Review.

Consolidation Curve for Video Games

Finally this year we are increasingly being asked by larger independents and major corporates (both games and technology/media/telecoms) to help them with Strategic Reviews of their businesses, generally as a precursor to games investment/M&A. This interest is coming both from companies looking for growth, and companies with great assets in ex-growth parts of the industry looking to take advantage of the dramatic changes generated by online/mobile games. Where once online/mobile games were seen as the Wild West, CEOs across industries now understand they enable real businesses with both high revenue growth and high operating margins.

So 2012 continues to look like a great time for games M&A and investment!

About Digi-Capital: Digi-Capital is an investment bank focused on high growth digital companies across games, technology, media and telecoms in America, Europe and Asia (China, Japan, South Korea). Digi-Capital’s Managing Director Tim Merel will be presenting on games investment and M&A at both GamesBeat/MobileBeat in San Francisco and ChinaJoy/China Games Business Conference in Shanghai in July.

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