Games deals hit inflection point

May 11, 2015

This Or That Way Directions On A Signpost

It was always going to be hard to replicate last year’s record $24 billion of games M&As and IPOs. Microsoft bought Mojang for $2.5 billion, Facebook bought Oculus for $2 billion, and King went public. So while $12.2 billion games M&As and IPOs in the 12 months to March 2015 was the third highest ever recorded, that number is only half the bumper exit market of 2014. Investments into games companies last year were 25% lower than three years ago, and fell a further 7% to $1.4 billion in the 12 months to March 2015.

Games deal makers find themselves at an inflection point. The next 6 months could either reset to lower historic average levels, or climb again towards the dizzying heights of 2014. A summary is below, with data and analysis of all the deals here.

Games Deals 2005 to 2015

The games investment market has narrowed to specific pools of capital. There are relatively few VCs investing in games compared to other sectors, although the VC universe broadens slightly for games technology. There is considerable presence from Chinese, Japanese and South Korean strategic investors in follow-on investment rounds for developers with strong metrics and potential to flourish in domestic Asian markets. Such investments have proven a good step towards long term exit relationships, with some larger deals in recent years coming from Asian buyers who were early stage investors. Crowdfunding remains a source of early stage funding, but accounts for less than 2% of total video games investment.

Games M&A has become increasingly strategic, such as the recent Nintendo and DeNA deal combining shareholding with commercial partnership to pivot into mobile. Similarly, acquisitions to move into new game genres are on the rise, with King acquiring Z2’s mid-core games strength. The games take-private and IPO markets have slowed, but this could change before the end of the year.

With mobile games revenue forecast to grow from $29 billion in 2015 to $45 billion in 2018, mobile dominated investments and M&A in the 12 months to Q1 2015. The potential breakout sectors of augmented reality and virtual reality are also attracting attention.

The stock market has been kind to games, with 11% average return across the games sector, 19% for mobile games and 16% for MMO games in the 12 months to March 2015. There were standout performances in other sectors, and a broad range of valuations relative to underlying economics.

Games Stock Market LTM to Q1 2015

The next 6 months are crucial for games deal makers, with mobile and AR/VR the catalysts for where the market heads next.

The full analysis is here.

Digi-Capital advises mobile internet, AR/VR, games and digital clients in America, China, Japan, South Korea and Europe