In November 2002 Angel Studios was purchased by Take Two for $28 million in cash and 235,000 shares of stock. A month earlier Activision purchased Luxoflux for $9 million and 110,000 shares of stock. That same year Infogrames (now Atari) purchased Shiny for a surprising $47 million, and who can forget Microsoft's purchase of Rare for a whopping $375 million? And the list goes on: Massive Entertainement, Rainbow Studios, Barking Dog, Black Box, Shaba Games, Gray Matter, Treyarch, Outrage, Volition, Digital Anvil, Westwood Studios, and more. All have been purchased by a major publisher and experienced the thrill of the end game.
For many developers, selling their studio is the final prize for a race well run. But what do you really know about how a deal goes down and whether or not you are a good prospect? What is it that will make your studio attractive? How will your company be valued? And perhaps most importantly, what can you do to prepare?
In this two-part series we will discuss the acquisition process as it relates specifically to the game industry. It is based on interviews with key executives from both sides of an acquisition transaction: independent game studios who have been purchased and the publishers who purchased them. Interviews were also conducted with attorneys and investment firms that deal in mergers and acquisitions within the game and software industries. And finally, research was conducted to quantify specific transactions and acquisition details.
In this first segment we will explore the relationship between developers and publishers and the motivations of each to enter into an acquisition. Beginning with a condensed history of game developer acquisitions, which you will find surprisingly informative, we will then look at why developers sell their companies and why publishers are interested in buying them.
In the final part segment, we will then look at how a developer's monetary value is determined, how the deal is put together, and what can go wrong during the acquisition process. We will end the series by considering the future and what the prospects might be like for you to one day play The End Game.
You should understand that mergers and acquisitions are complex business relationships that require the help of legal and accounting professionals. The information contained in this article is intended to give you a basic overview of this process as it relates specifically to the interactive game business. Neither Dan Lee Rogers nor BizDev, Inc. makes any representation or warranty of any kind, whether expressed or implied, with respect to the accuracy or completeness of the information. All information is provided on an "as is" basis, including, but not limited to, warranties of merchantability, non-infringement, or fitness for any particular use.
Acquisition History in the Game Industry
Much of the information included in the table below was collected from financial data released by publishers as required by the Security and Exchange Commission (SEC). Notwithstanding this, I am thankful for the input provided by numerous individuals as well. Please note that information from non-public sources is speculative and presented only in an atmosphere of more fully understanding the dynamics of the industry.
By overlaying the acquisitions in this table with major industry events (such as the introduction of the PlayStation 2) you can imagine how environmental factors could have affected each transaction. Microsoft's purchase of Rare in September 2002 could be an example of this.
$375 million dollars in cash (the purchase price of Rare) is the most paid for any developer to date. Although Rare was a proven developer of hit games, it appears to be an unusually large sum for a development studio. However, when you consider environmental factors, such as Microsoft's goal to establish itself as a premium console manufacturer (Xbox), it is more easily understood. Rare not only added positive net income to Microsoft Game Studios, but it helps secure their position in the console market. And if indeed this goal is met, then not only will the acquisition have a positive effect on Microsoft/Rare's future product sales, but on the sales of all Microsoft Xbox products.
* Information speculative
Why Developers Sell Their Studios
Without surprise, financial security is the most common reason for independent developers to sell their companies. But this should not be confused with a take-the-money-and-run scheme where one sells his company and retires to a beach in the Bahamas. Occasionally a developer will leave shortly after an acquisition, but in general this is not in line with a publisher's expectation. Publishers expect to see a significant return on their investment, and acquisitions are structured to ensure this through the continued participation of key employees.
Many of the developers we spoke with sold their companies out of growing concern for growth and the complexities of working with multiple publishing partners. Generally, their collective motives fell into these categories:
- Concern over growth
- Concern over technology changes
- Leverage marketing and distribution
- Benefits for employees
- Personal growth
Concern Over Growth
Many developers who have sold their studios concluded that a single publisher partner was necessary in order to simplify business relationships and provide long-term financial stability. Also, an underlying concern was that their selling-price was at an all-time high.
As one developer explained, "As your size grows dramatically, projects can get behind and publishers may refuse to pay, some may cancel projects, and others may go out of business. When you're smaller it may be possible to weather these events with personal cash, loans, etc., but as a larger developer a "Perfect Storm" of these events can deliver a really serious blow".
For a developer, sustained growth becomes increasingly complex and risky as the studio grows, since most publishers require non-compete agreements that prevent them from working freely within the industry. To keep teams busy, they often worked with publishers that were less stable financially then themselves. So as their burn rate increased, mistakes and wrong turns were more costly and deadly.
The transition from one console generation to the next is a powerful catalyst to secure business relationships.
For some, during the transition from PS1 to PS2, their motivation for selling was based on concerns about the implications of