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With consolidation a major game industry trend, Dan Lee Rogers provides an update, spanning 2004, of which game publishers and developers bought whom, and for what reasons, as well as discussing other intriguing trends such as long-term publishing agreements.

February 25, 2005

17 Min Read

Author: by Dan Lee Rogers

Last year, we concluded a comprehensive study of the most prominent independent developer acquisitions of the last decade, discussing the motivations for both publishers and developers to enter into an acquisition, and including advice from a number of industry professionals regarding this topic. That article is still available on Gamasutra.

This year, in concert with the Game Developers Conference seminar "Where Are You Going with Your Studio", we have updated this base of information to include acquisition activity in 2004.

What is New?

Just as it has been a foremost goal in the past, this year a number of prominent independent developers sold their studios to major industry publishers. They sold for many of the same reasons that past developers sold their companies: concern over growth in a changing development business environment, concern over technology changes and the impact of next-generation hardware, a more stable investment future, and liquidity.

For publishers, acquisitions in 2004 appear to reflect a more strategic view of their competitive environment and their anticipated ability to compete in a next-generation-console world. In keeping with historic acquisitions, however, publishers continue to select development partners that they perceive as having strategically superior technology, valuable intellectual property, and reputations as being best-of-class. Publishers have continued the trend of building their internal studio capability in order to maximize control and quality, and lower costs. Whether they will achieve these goals is yet to be determined. Nevertheless, this too has affected the independent development community.

"With the amount of money needed to compete in this business, the challenges for the external development community are going to get more intense than ever before. The likelihood of recouping with a development budget in excess of $10 million dollars is going to be quite challenging."

  - Michael Pole, Vivendi Universal, on   Vivendi's exclusive deal with Radical


In a consolidation trend similar to what we have experienced on the publisher side, larger independents are consuming more of the open, available projects, making it difficult for smaller developers to compete, both technologically and financially. As profits tighten for all developers, a greater number are interested in finding shelter beneath the roof of a stable purchasing partner.

Whether intentional or not, publishers continue to exert their experience and financial leverage over independents, and as a result, royalty-based development agreements have become even more constrictive and demanding. Many independents have come to the conclusion that actual royalties beyond their development advance are an illusion. This is accentuated when substantially high third-party licensing fees are deducted before a developer's royalties are calculated. (See "The Bottom Line on Licensing", Game Developers Conference 2005).

Independent developers are also facing increasingly higher overhead as a function of bigger, more complex projects. Because next generation games will require even higher head-counts and fixed costs, we believe that developers will be motivated to seek shelter through an acquisition, such as what was experienced during the transition between the PlayStation 1 and the PlayStation 2.

Also appearing more frequently are long-term publishing agreements, similar to the exclusive, six-title agreement signed between Radical and Vivendi last year. While the financial terms of the that deal were not disclosed, Vivendi reported that in addition to Radical's development commitment, they also secured a royalty-free right to Radical's proprietary technology and hold an exclusive right of acquisition during the term. I maintain that while this may have been Radical's best option at the time, the deal may ultimately favor Vivendi. Essentially, Vivendi appears to have acquired Radical's assets and exclusive attention without the sizable investment usually associated with the sale of a two-hundred person development company.

Activision and Take-Two have struck similar deals. Over the past few years, Activision has signed long-term publishing agreements with Stainless Steel Studios, Spark, and Lionhead Studios. Likewise, in January 2005 Take Two announced a long-term publishing agreement with Sid Meier's Firaxis.

In the future, other publishers may look for long-term agreements with those who either do not want to be purchased or those who are willing to give up the prospect of an outright acquisition tomorrow in exchange for a more stable future today.








Shadowbane - MMO





Max Payne GBA, High Heat Baseball GBA

Take Two

$4.5 million, of which $3.6 million was paid in cash, $920K due in March 2005. T2 recognized identifiable intangibles of $960K (non-competition agreements) and goodwill of 4.6 million. $2 million more based on delivery of products.


IO Interactive

Freedom Fighters, Hitman


£36 million ($68 million) in cash and stock, along with a payment of up to £5 million linked to the four year performance of the studio.


Surreal Software

The Suffering


All-stock transaction: 540,317 common shares with an additional 137,199 restricted shares issued to key employees.



Homeworld, Warhammer: Dawn Of War


$6 million in cash and $4 million over the next two years.



Burnout, Renderware

Electronic Arts

According to a 10-Q form filed with the SEC, Electronic Arts spent somewhere in the range of $48 million to buy Criterion Studios.



Hunting Unlimited

Hip Interactive

871,312 common shares of which 55,607 are being held in escrow for a period of up to one year. Under the terms of the escrow agreement, the principal shareholder of ARUSH is entitled to purchase the escrowed shares from Hip at a price of $1.50 per share.



Tron 2.0, No One Lives Forever, Aliens vs. Predator 2

Warner Brothers




The Hobbit, Defender, Tribes: Aerial Assault


All-stock transaction: 218,421 common shares with an additional 152,824 restricted shares issued to key employees.



Rocky Boxing

Take Two

$1.2 million in cash, recording identifiable intangibles of $750K and goodwill of $620K


Digital Illusions

Battlefield 1942

Electronic Arts

EA now controls approximately 67.3% of DICE, and all the 2,329,102 outstanding company warrants.



Mortal Kombat, Backyard Wrestling


All-stock transaction: 333,334 Midway common shares, with 261,906 restricted shares issued by key employees.


Indie Built

Microsoft's former sports team, Top Spin, Links, Amped

Take Two

$18.5 million in cash, recording $5.8 million in identifiable intangible assets, $11.5 million of goodwill, $280K of fixed assets, and $820K of accounts receivable.


Vicarious Visions

Shrek 2, Spider-Man 2 DS, PSP




Visual Concepts / Kush Games

ESPN 2K sports

Take Two

$24 million in cash with rights to all intellectual property associated with the sports titles, as wells as rights to the 2K brand.

Developer Acquisitions

It Only Takes One

"The relationship and experience we have already shared over the past five years gives us great confidence in their ability not only to maintain the outstanding success of Hitman, but also to develop new titles of unique IP."

  - Mike McGarvey, CEO of Eidos, about the purchase of IO Interactive


In March of 2004, Freedom Fighters and Hitman creator IO Interactive, was purchased by Eidos for £42 million ($80 million), proving that it only takes one hit to initiate an acquisition. While Hitman 2: Silent Assassin sold in excess of 1.5 million units and generated over $60 million dollars in gross retail sales, prior Hitman games were not as successful. In 2000, IO's Hitman: Codename 47 for the PC generated approximately $7 million dollars in gross revenue and sold fewer than 300,000 units in the US. Reviews reflected this. Game Rankings scores for Hitman: Codename 47 averaged 71%, which is seldom enough to get a publisher's attention.

But Hitman 2: Silent Assassin was different. First, it was released across all console platforms (including the PC). Second, the quality improved significantly, with Game Rankings scores averaging 85%. It also appears that IO's technology or process had taken a substantially favorable turn. Freedom Fighters, being developed at the time for EA, obtained similar review scores, averaging 82%. It is reasonable to assume that Eidos was at least partially motivated to acquire IO in order to protect its investment in Hitman and IO. At £42 million ($80 million), Eidos' purchase of this 137-person development team was one of the largest of 2004.

Midway Makes Surreal Acquisitions

In March 2004, Midway began a shopping spree that would last through out the year. First, Midway purchased The Suffering and Drakan developer Surreal Software in an all-stock transaction worth approximately $6.5 million dollars. Then in August, Midway acquired Inevitable, creator of the latest Defender update and Sierra's The Hobbit in another all-stock transaction worth approximately $3.7 million dollars. Finally, in December Midway purchased LA-based Paradox, developers of Mortal Kombat and other fighting games, for approximately $6 million dollars.

The Midway all-stock proposals hit pay-dirt with these three developers, no doubt leveraging a promise of better days under new management and Sumner Redstone's financial umbrella. In each transaction, Midway also issued restricted stock to key employees. It is likely that this was designed to retain these individuals during this formative time.

It is important to note that in an all-stock transaction, the value of the deal at the time a developer is able to liquidate can be significantly different than the value of the stock at the time of acquisition. We discussed this in "The End Game 2004" with Sculptured Software. Sculptured was acquired by Acclaim in 1995 in an all-stock transaction, and shortly thereafter Acclaim restated their income. The stock price dropped significantly, and Sculptured was suddenly committed to a substantially less favorable deal. Fortunately, they were able to re-negotiate, but for a time their profits had nearly vaporized.

Over the past two years, Midway's stock has grown considerably, starting in January 2004 at $4.27, rising to a high of $12.47 in August of the same year, and then falling to the current price of $9.32 (January 2005). The financial affect on Midway's new studios has been mixed. Surreal's shares are worth approximately $1.2 million dollars more than when their company was acquired. But Inevitable's shares are worth $1.0 million dollars less. Nevertheless, both companies could realize significant profits if Midway's stock continues to grow.

Electronic Arts' Key Acquisitions

EA made two significant acquisitions or majority holdings in 2004. The first was expected-the second was not.

Predictably, EA completed its majority holding of Digital Illusions in November, acquiring 48% more of the company. Combining this with their initial 19% investment in 2003, EA now has controlling interest, owning approximately 67.3%, although it does not own the entire company. It also controls 2,329,102 outstanding warrants.

"Criterion is a great cultural fit with EA. We've had a great relationship working on Burnout 3 the past year. The talent, the intellectual property and the middleware technology all combine to make this an acquisition EA is really excited about and further readies us on the next generation of hardware."

  - Trudy Muller, EA


When purchasing independent developers, EA continues to demonstrate that it was most interested in those with both technology and enduring brands. A senior EA executive revealed that the Digital Illusions purchase was driven by a winning combination of network-centric technology and the Battlefield 1942 brand.

What was more surprising was EA's acquisition of Criterion in August 2004. Criterion, the creator of the Burnout racing series, is known equally well for its middleware solution Renderware. In a deal that was valued at $48 million dollars, EA purchased both. It is important to note that Burnout was first published by Acclaim in 2001, and review scores at that time were averaging 78%. In its next release, Burnout 2 improved significantly, with average Game Ranking scores of 85%. But EA's timing was flawless. Capitalizing on Acclaim's decline last year, EA acquired both the developer and the franchise. They released Burnout 3 over the holiday and achieved Game Ranking review averages of 93%.

EA reports that it will use Renderware as a basis for its next generation platforms, but in doing so some industry executives are concerned that this may compromise Criterion's ability to sell it as a middleware solution. At least one publisher we talked with felt that their future use of Renderware was in question.

Take Two Takes Three

Cash-rich Take Two's activity reflected a key initiative to compete in the sports genre. In 2004, they completed three acquisitions. In March, they acquired portable developer Mobius for $4.5 million dollars, $3.6 million of which was in cash. Prior to the acquisition, Mobius had developed Max Payne GBA for them, and in what may have been an early signal of their interest in sports, 3DO's High Heat Baseball for the PS2.

In a second transaction, in September 2004 Take Two acquired United Kingdom developer Venom for $1.2 million dollars. Founded by former Rage employees, Venom emerged from Rage's receivership with the rights and technology to Rocky, a boxing game that had moderate success on the PlayStation 2 and Gamecube.

"We were very impressed with the Mobius development team from the time they began work on the Game Boy Advance version of Max Payne. They bring a uniquely progressive vision to the titles they develop and we believe this studio is ahead of the industry on next generation handheld development. We are proud to have them join the Rockstar family."

  - Sam Houser, President of Rockstar   Games


In December 2004, Take Two acquired Microsoft's Salt Lake City sports development team, Indie Built for $18.5 million in cash. Indie was the developer of Microsoft's Amped, Top Spin, and Links Golf games.

Still reeling from EA's exclusive NFL deal1, in January 2005 Take Two exercised their option to purchase Sega's ESPN sports developer Visual Concepts for $24 million in cash. Furthermore, they secured exclusive third-party rights to the Major League Baseball license for an undisclosed amount.

Also, in January 2005, Take Two signed a long term publishing deal with Sid Meier and Firaxis, giving them certain rights to the Civilization franchise.

Activision's Investment Avoids Extreme

In 2002, in a move to accelerate its O2 extreme sports brand, within a twelve-month period Activision purchased Grey Matter, Shaba, Z-Axis, Luxoflux, and Treyarch. Unfortunately, outside of Tony Hawk, Activision's O2 brand failed to generate notable sales. Wakeboarding Unleashed, developed by Shaba, did not sell well. And Kelly Slater Pro Surfer, developed by Treyarch, also didn't set the world on fire. Activision dissolved the O2 brand almost as quickly as it was started, and then set about finding development projects for these new internal studios.

Fortunately, the latter part of 2004 was profitable for Activision, with Spider-Man, Tony Hawk's Underground, and Call of Duty all selling extremely well. In January 2005, Activision announced the acquisition of well-known Game Boy, console and middleware developer Vicarious Visions. Prior to the acquisition, Vicarious had maintained a strong relationship with Activision, developing Spider-Man 2 for the Nintendo DS and PSP, Id's Doom 3 for the Xbox2; and Shark Tale, Shrek 2, and Tony Hawk Underground for the GBA. The 100-person studio has also developed other hit handheld games, including Crash Bandicoot, SpongeBob Square Pants, and Star Wars. Terms of the deal were not disclosed, but Activision cited Vicarious Visions' proprietary Alchemy(TM) middleware technology as an opportunity to enhance their next-generation development capabilities.

Other Activity

In March 2004, Ubisoft acquired Shadowbane developer Wolfpack, citing Wolfpack's massively multi-player technology as a primary motive. Later that year, EA would surprise everyone by acquiring nearly twenty-percent of Ubisoft for approximately $90 million dollars. Ubisoft reported that EA's purchase was unsolicited and hostile. Ubisoft employs over two-thousand workers and posted sales of $618.9 million in 2004

Relic and Rainbow

Note the differences in the acquisition price of Relic and Rainbow. For both, goodwill (substantially the difference between actual physical value and perceived value) accounts for the majority of the sale price (88% for Relic and 91% for Rainbow).

At the time of its acquisition, Rainbow had over 100 employees and developed substantially for the PS2 and Xbox, whereas at the time of its purchase, Relic had approximately 60 employees and developed substantially for the PC.

Relic Valuation as reported in THQ's 8K report, November 2004

Estimated Fair Value (in thousands)


Cash acquired


Tangible assets acquired


Intangible assets acquired


Liabilities assumed




Purchase Price


Rainbow Valuation, as reported in THQ's 10K report 2002

On December 21, 2001, THQ issued approximately 1,287,000 shares of common stock and assumed approximately 159,000 stock options as part of the purchase price of Rainbow Multimedia Group, Inc. The issuance increased common stock and additional paid-in-capital by $13,000 and $48.6 million respectively, and was allocated among the assets acquired.

Estimated Fair Value (in thousands)


Cash acquired


Tangible assets acquired


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