The End Game: How Top Developers Sold Their Studios - Part One

Dan Lee Rogers has researched the issues surrounding the sale of independent game developers to larger houses--including the financial terms and interviewing key executives, attorneys, and investment firms to help you understand how to be prepared for any sale you might be involved in.

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.

1991 Distinctive 4D Boxing, Hardball, Test Drive Electronic Arts $11 million ($785K in cash)*
1992 Origin Wing Commander, Ultima Electronic Arts $35 million stock (estimate)*
1992 Westwood Kyrandia Virgin $5 milllion value (estimate)*
1995 Iguana Turok Acclaim $5 million cash + undisclosed stock
Oct-95 Sculptured Software Star Wars, Mortal Kombat, Jack Nicklaus Golf Acclaim $30 million in stock
Oct-95 Probe Die Hard, Back to the Future, X Men Acclaim $30 million in stock (estimate)*
1995 Papyrus NASCAR Sierra $40 million stock (approx.)*
1995 Impressions Ceasar II, Lords of the Realm Sierra $8 million stock (approx.)*
1995 Bullfrog Populous, Syndicate, Magic Carpet Electronic Arts $25 million (estimate)*
Apr-96 Headgate PGA Championship Golf Sierra $8-10 million stock*
Sep-96 Mission Studios Jet Fighter Take Two $1,674,478 cash, 182,923 stock (value $440,000). Promissory note value
Jun-96 Formgen Duke Nukem GT Interactive 1,030,000 shares GT stock
Jul-96 Humongous Freddie Fish, Putt Putt GT Interactive 3,458,000 shares GT stock
Dec-96 DMA Lemmings Gremlin £4.2 million
Apr-97 Berkley Systems You Don't Know Jack Sierra $25 million stock (approx.)
Jul-97 Maxis Sim City Electronic Arts $125 million value stock
Sep-97 Raven Solidier of Fortune Activision Value 13 million, 1,040,000 shares
Sep-97 Odd World Abe's Oddysee GT Interactive $7 million (TCI portion ) (estimate)
Oct-97 SingleTrac JetMoto, Twisted Metal, Twisted Metal II and WarHawk GT Interactive $5.4 million in cash and 700,000 shares of stock valued at $7.2 million, (total value of $12.6M)
Aug-98 Westwood Command and Conquer, Lands of Lore Electronic Arts $122.6 million (majority to Westwood)
Sep-98 Crystal Dynamics Gex, Soul Reaver Eidos $47.5 million US (£28.4)
Dec-98 Talonsoft Battleground, Art of War Take Two 1,033,336 shares (accounted as a pooling of interest
Dec-98 Reflections Driver, Distruction Derby GT Interactive 2.28 million shares of common stock
Dec-98 FASA MechWarrior Microsoft Undisclosed
Jan-99 Legend Mission Critical, Death Gate GT Interactive $13.5 million stock
Mar-99 Gremlin Grand Theft Auto, Realms of the Haunting, Loaded Infogrames $36.8 million cash
Sep-99 DMA (Owned by Infogrames) Grand Theft Auto, Realms of the Haunting, Loaded Take Two $11 million cash (assumed DMA debt)
Apr-99 Access Software Links Microsoft Undisclosed
May-99 Pacific Coast and Power Activision THQ $10M in stock (estimate)
Oct-99 Neversoft AMDK, Tony Hawk Pro Skater Activision 700,000 shares stock (est. value 10M)
Nov-99 Bungie Myth Take Two $5 million cash for 19%
Jun-00 Bungie Oni, Myth, Halo Microsoft Est. value $20-$40 million (based on Take Two sale of 19% @ 5M cash, 5.8 sale of Bungie assets)*
Jul-00 Pop Top Railroad Tycoon II, Tropico Take Two 559,100 shares (est. value $5.8M)
Jul-00 LTStudios Startup with multiplayer concepts Argonaut £300K for 30%, 9.5% bond, remaining 70% purchased 9-2001 for a nominal sum
Aug-00 Volition Freespace, Red Faction THQ 890,100 shares common stock + 109,900 shares common (options)+ 500K debt assumed (est value $21.25M)
Oct-00 Just Add Monsters Kung Fu Chaos Argonaut £200,000 cash and 400,000 stock plus a deferred £210,000 in Loan Notes
Dec-00 Digital Anvil Freelancer Microsoft Undisclosed
Jan-01 Red Zone NFL Gameday Sony Undisclosed
Jan-01 Naughty Dog Crash Bandicoot, Jak and Daxter Sony Undisclosed
Feb-01 Blue Byte The Settlers Ubi Soft Value 13 million Euros ($8.2 M US)
May-01 Ensemble Studios Age of Empires Microsoft 926,077 shares common stock (est. value $83M)
Jul-01 Red Storm Rainbow Six Ubi Soft $43 million value
Jan-02 Particle Systems Powerdrome, SubWar 2050 Argonaut £2.4 million in total plus 3.5M in Argonaut shares
Jan-02 Gray Matter Return to Castle Wofenstein Activision $3.2 million in stock
Jan-02 Rainbow Studios Motocross Madness, Splashdown THQ Total value est. $44.6M (1,287,000 shares of stock plus performance incentives)
Apr-02 42-Bit Rally Championship 7 Warthog Value £400,000 (in Warthog shares), futher 700K shares based on performance
Mar-02 Shaba Games Wipeout, Big Hurt Baseball, Magic: The Gathering Activision 387,932 shares of common stock. Value $7.4 million
Apr-02 Shiny MDK, Matrix Infogrames $47 million (31M cash, 16.2 promissory notes)
May-02 Outrage Decent PC THQ Undisclosed
May-02 Z-Axis Dave Mirra Freestyle BMX Activision $12.5 million in cash and 373,385 shares of stock. Total value $20.9 million
Jun-02 Black Box NHL Hits, Need for Speed, Sega Soccer Electronic Arts 14M rumored value*
Aug-02 Barking Dog Global Operations, Homeworld: Cataclysm, Treasure Planet Take Two $3 million cash, 242,450 shares restricted stock (total est. value $9M)
Sep-02 Rare StarFox, Donkey Kong Microsoft Total $375 million cash, $100m of which to Nintendo
Oct-02 Luxoflux True Crime, Vigillante, Streets of LA Activision $9 million cash
Oct-02 Treyarch Invention Tony Hawk, Spider-Man Activision 1,228,442 shares common stock. Total value $18.2 million
Oct-02 Massive Entertainment Ground Control Vivendi Universal Undisclosed
Jan-03 Infinity Ward Call of Duty Activision Undisclosed
Nov-02 Angel Studios Smuggler's Run, Midnight Club, Red Dead Revolver, Transworld Surf Take Two $28 million cash, 235,679 shares restricted stock (total est. value $38M)
Dec-02 Zed Two Pillage Warthog £1.5 Million over 3 years, contingent on performance*
2003 Fever Pitch Starlancer (former Digital Avil developers) Warthog Value $ 300,000 Warthog shares
Sep-03 Pivotal Games Conflict Desert Storm SCi Value £2.4 million (Sci already owned 10%)*

* Information speculative

Why Developers Sell Their Studios

"As we grew, we were constantly under pressure to deliver a big title every Christmas. I can't talk for the others, but my decision to sell was related to the pressure of keeping everyone employed. If our main product missed Christmas one year, we would have to let 1/2 the employees go. So initially, I was relieved to attach our company to a larger and more stable company." Richard Garcia, formerly of Papyrus Software


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.

Technology Changes

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

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