It’s Playtime in the Video Game Industry

Video games served as a panacea to many throughout 2020 as the COVID-19 pandemic and ensuing lockdowns caused individuals to spend significantly increased amounts of time at home. As a result, the global gaming industry thrived in 2020 with the total market value figure reaching 162.3 billion USD, a 7.06% increase on 2019. Major gaming stocks, including Nintendo, Blizzard and Take-Two, soared after the lockdowns began in March 2020: Nintendo saw an increase of 98.1% on the Tokyo Stock Exchange from March 2020 to December 2020, with Blizzard and Take-Two experiencing 53.4% and 85.4% price increases respectively. The rallies attracted predatory attention within the industry, resulting in numerous acquisitions in the third and fourth quarters of 2020, with experts predicting the M&A activity to continue. The report will explore the recent acquisitions in the industry, and some of the driving factors behind the deals.

 

In September 2020, US tech giant Microsoft acquired ZeniMax, a private independent gaming company, for 7.5 billion USD. Being Microsoft’s third-largest acquisition ever after their acquisitions of LinkedIn (26.2 billion USD)  and Skype (8.5 billion USD), the size of the deal itself illustrates the high quality of the target. The fact that the tech giant bought the gaming company, which owns eight creative studios, reflects their determination to join the battle for original gaming content. By acquiring ZeniMax, Microsoft also gained ownership of its subsidiary, Bethesda Softworks, and therefore their bestselling video games Fallout and Doom. Owning ZeniMax enhances Microsoft’s capability to produce quality games on its own, especially for Xbox, its branded gaming console, due to the experience and past success that ZeniMax has in the sector. Such capability is required to combat its major competitor, Sony, the Japanese conglomerate, which has announced six new games to be released in 2021. Therefore, Microsoft’s decision to acquire ZeniMax can be attributed to the gaming industry boom, the increased need to produce original gaming content and the potentially changing business strategies in response to the COVID-19 pandemic.

 

The acquisition of ZeniMax in September 2020 was followed by a bidding war for Codemasters in Q4 2020. Codemasters is a British video game developer, famously producing the F1-series racing game. The bidding war was between two rivals – Take-Two, a US video game company which distributes the 2K-series basketball game, and Electronic Arts (EA), also a US gaming company which produced FIFA, the football game, both with a market value over USD20 billion in 2020.

 

In November 2020, Take-Two launched a 740 million GBP offer, which was accepted by the board of directors at Codemasters. The takeover would have resulted in Codemasters’ racing simulator joining Take-Two’s collection of sports franchise games. However, EA made a counteroffer of 945 Million GBP just a month after Take-Two’s. Eventually, Take-Two withdrew its bid in January 2021, and Codemasters signed off EA’s offer in the same month, adding their racing games to EA’s portfolio of sports franchises. EA’s move is most likely a response to the huge disparity of revenue growth between the company and Take-Two. Between 2016 and 2018, Take-Two experienced a 72% increase in revenue, whilst EA’s revenue only grew 7.2%. Therefore, it is possible to argue that EA acquired Codemasters in the hope of expanding its product line in the booming video game industry in a bid to catch up with Take-Two, its rival.

 

Smaller firms, like ZeniMax, are prone to predatory action, especially after the economic impacts of the COVID-19 pandemic, where Microsoft, Take-Two, EA and similar companies profit from revenue growth to acquire independent companies. Smaller firms, which lack the financial strength to adapt to the structural shifts introduced by COVID-19 or are temporarily undervalued as a result of balance sheet issues caused by the immediate impacts of the pandemic, are at risk of being acquired at what is a cut-price to huge firms such as EA and Take-Two.

 

To conclude, it is evident that the gaming industry has been re-energized since the start of last year, and as a result of this, the number of mergers and acquisitions in the industry has been accelerating. The pattern of larger firms aggressively acquiring suggests the biggest firms in the industry believe that there is more value to be realised from struggling firms within the sector and points to expectations of an increasingly brighter future for the industry. At the same time, the hostility observed in the Codemasters’ bidding war suggests that the larger firms will not allow one another to claim market share easily, and it can be expected that a number of firms within the industry will have mutual targets for acquisition in the coming year. It thus would seem that the industry faces an exciting year ahead.

 

By Sam Cheng

Sector Head: Daniel Regan

 

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