Gaming acquisitions and public market deals continued to gain momentum in second quarter of 2024 as the market gradually gets better, according to Drake Star Partners.
With 52 announced M&A deals and $3.5 billion in disclosed deal value, Q2 was the third straight quarter of continued increase in deal activity that bottomed out in Q3’23 (with just 33 deals), said Michael Metzger, partner at investment bank Drake Star Partners, in an interview with GamesBeat.
“It’s exciting that we saw further pickup in M&A activity for the third quarter in a row,” said Metzger. “We also saw a good amount of activity in public market financing, whether that’s equity or debt with Embracer or Take-Two. There’s more money flowing into the public markets. That’s great.”
Private equity firms are driving the deals this year, particularly for the biggest deals so far as private investors take companies private, Metzger said. He noted that private investment deal volume is down a little compared to a year ago, but he noted there was a mini-boom again in blockchain game investments.
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The biggest buyers
The biggest deal of the year so far was announced in the quarter, with private equity firm EQT saying it would buy external game development firm Keywords for $2.8 billion. Metzger believes this kind of acquisition will lead to a number of related smaller acquisitions.
“They have to believe another upcycle is coming,” Metzger said. “It’s a time of uncertainty, but also a time of great opportunity for company like Keywords, if they heavily invested in AI.”
AI is a wild card that could change game development. But whatever the likely effect, it’s almost a certainty that it will spur more M&A activity, Metzger said.
Other notable strategic buyers during the quarter were Infinite Reality (a metaverse company doing stock swap deals), Miniclip/Tencent, Nintendo and Tripledot.
Konvoy Ventures also recently announced its own Q2 game investment and M&A numbers as well. That report noted the downward trend in game VC investments in Q2 compared to a year earlier.
Big private financings
Private financings appear to be stabilizing with 181 deals in Q2’24, staying flat compared to Q1 (193 deals). Most of the capital went into blockchain gaming, accounting for 40% of total deals and 45% of disclosed deal value. Zentry raised the largest round ($140 million) in the quarter, followed by Spyke ($50 million) and child online safety firm k-ID ($50 million).
Investment dollars are mostly focused on early-stage companies (94% of total deals). Asia led with five of the largest financings, followed by three in Europe, and one each in Turkey and the U.S. Very little VC money went to gaming studios. Bitkraft was the most active VC, followed by A16Z, Play Ventures and Vgames.
2024 outlook
Drake Star Partners anticipates that M&A activity will continue to strengthen throughout the remainder of this year and into 2025, buoyed by the broader recovery of the public gaming company market.
While the investment bank expect big players such as Tencent, Take-Two and Playtika to be active buyers, the volume of mid- to small-sized deals will likely continue to increase. As predicted, private equity firms have been the top buyers so far in 2024 (CVC /Jagex, EQT/ Keywords), and Metzger said we will likely see more acquisitions and take-private deals by private equity firms. With limited mid- to later-stage financings available, Drake Star expects some gaming companies to opt for earlier exits.
Following Voodoo’s $524 million purchase of social video firm BeReal, other gaming companies are likely to diversify in adjacent segments by acquiring mobile app companies. For financings, AI, mixed reality, platform and tools continue to be hot segments.
Where the deals are
Web3 game investments were about 40% of all deals and 44% of deal value in Q2. That’s a lot more than previous quarters, with most of the companies based in Asia. Part of this was more gamer approval of Web3 gaming in Asia, as well as the recovery in crypto prices.
That, as well as some launches of new Web3 games and a recovered crypto market, signals a revival in the Web3 gaming prospects, Metzger said.
About half of the deals are in Asia, and crypto game deals are more likely to happening in Asian than in the U.S. or Europe.
“Surprisingly, little money is flowing int U.S. companies for announced deals,” Metzger said.
Metzger said there are forces for a revival of dealmaking, such as the possibility of Federal Reserve cuts in U.S. interest rates. But mobile continues to be a difficult market for venture-backed startups, whereas there have some big successes on the PC and console side. When times get tough for raising money, that spurs the sale of a lot of smaller game companies to larger ones. So it’s still a mixed picture.
Metzger said that the Voodoo acquisition of BeReal is an example of “gaming adjacent” deals. Drake Star didn’t include that deal as a gaming deal because BeReal wasn’t a gaming company.
Public game companies could be buyers/investors
And after the highly successful IPO of Shift Up in Korea, Drake Star anticipates that several IPO-ready companies such as Appsflyer, Discord and Epic Games are starting to plan for a listing in the quarter to come.
On the public market side, Drake Star looked at recent history of 30 game companies and put them into a game industry index. The top performers were Konami, Logitech and Krafton. At the bottom of the list were NCSoft, Kakao, Embracer and Unity. Drake Star believes the overall valuation of the indexed companies could go up in the second half of this year or early next.
“That will also accelerate M&A activity,” he said. “If it stays flat like it has been, then there will probably be fewer deals and maybe more IP-driven deals.”
But he broader market of gaming stocks has not recovered yet. The leading listed indie and double-A game developers and publishers have seen a significant rebound this year.
Some past acquirers like Unity have been quiet, as Unity has a new CEO in Matt Bromberg, who replaced John Riccitiello as the Unity boss. It seems like Unity is focusing on internal operations in the meantime. Atari, meanwhile, has done six deals with a total value reported of about $27 million. It has picked up properties like Intellivision and others for relatively low prices.
Reconciling M&A and investment recovery with layoffs
I asked how Metzger looked at the layoffs in the game industry on the one hand — 8,500 in 2022, 10,500 in 2023 and perhaps 11,000 so far this year — and how that reconciles with the view of a recovering M&A and game investment market.
“My guess is the worst is over,” Metzger said. “A lot of the big companies that maybe were a little bit bloated and just hired a lot of people during the COVID frenzy. They have adjusted by now. If they are at the bottom of the index, they may still do further belt tightening. But my guess is that the companies are done with [a lot of the layoffs] now.”
For companies in the startup ecosystem, there’s the challenge of being able to raise money. Those companies are laying off people to be able to get to revenue with down-scoped games. Funding is still tight, and that could spell doom for startups that need it.
I also asked how soon could the market flip, where there is a lot of demand for talent again like there was before and during the pandemic. AI talent is likely in high demand, but Metzger believes that it could be some time before we see acqui-hires or bidding wars for game talent again.
“There’s so much good talent out on the market there still,” Metzger said.
The big deals
Embracer Group announced its plan to restructure its business into three separate listed public companies. Embracer Group announced a transformation plan to unlock the full potential of each business segment via split into three standalone public listed companies in Asmodee Group, Coffee Stain & Friends, and Middle-earth Enterprises & Friends, and raised $980 million in debt financing.
GameStop raised $3.1 billion through two follow-on offerings that involved the sale of 120,000,000 shares.
Swedish private equity firm EQT and the game development services provider Keywords reached an agreement on an acquisition valued at $2.8 billion with the goal of accelerating Keywords’ growth through both organic as well as accretive M&A strategy
Infinite Reality acquired Drone Racing League for $250 million and Action Face, a digital avatar creation tool, for an undisclosed sum to bolster its portfolio of brands aimed at facilitating immersive experiences.
Nintendo acquired Shiver Entertainment, the studio responsible for the Switch ports of Hogwarts Legacy and Mortal Kombat 1, from Embracer, strengthening its development resources.
Miniclip, a subsidiary of Tencent, acquired the game developer Futurlab, known for the PC and console game PowerWash Simulator. CyberAgent acquired the content producer NitroPlus, known for the popular card video game Touken Ranbu, for $106 million with the goal of growing its IP-based business.
GuildFi, rebranding as Zentry, raised $140 million in a round that included new investors Spartan Capital, Synergis, LongHash Ventures DWF Labs and existing investors Animoca, Binance Labs, Coinbase Ventures and Pantera Capital. The funding will help Zentry build digital infrastructure utilizing blockchain that connects player progression across many games and platforms.
k-ID, a digital login system to protect children from age-inappropriate content, raised $50 million lead by Andreesen Horowitz and Lightspeed Venture Partners with participation from Okta, Z Venture Capital and existing backers Konvoy Ventures and Tirta Ventures. The funding will help k-ID develop a cross-platform
sign-in system that will help children access age appropriate video game experiences.
The Turkish mobile games studio Spyke raised $50 million from Moon Active, known for the popular mobile game Coin Master. Moon Active purchased 15.9% of Spyke at a valuation of $315 million. The funding will help Spyke, a developer of casual mobile games, to develop and grow its mobile games offerings.
Spanish video game studio Bespoke Pixel, founded by Ubisoft veteran David Polfeldt raised $25 million with the long-term goal of creating a game based on original IP. The funding will help the young video game developer initially create playable prototypes before pursuing its long-term goal of creating a game based on original IP.
The Sandbox, a metaverse gaming platform, raised $20 million in a round that included Kingsway Capital and LG Technology Ventures. Take-Two Interactive raised $600 million in debt refinancing in June through the sale of senior notes. The deal helps The Sandbox aim for its goal of building a metaverse platform based on user-generated content and digital property rights.
Modern Times Group raised $95.5 million in a PIPE transaction that sold 9.1% of the company to Lannebo Fonder, Evermore Investments, Atairos, Swedbank Robur and Active Ownership Capital.
OpenRec, a game streaming platform, also got funding to grow its offline events as well as develop original IP. For its methodology, Drake Star puts announced deals into the quarter when they are announced, rather than when they are closed, for consistent reporting.
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