What does bankruptcy mean for the future of THQ?

Embattled game publisher THQ has filed for bankruptcy, and despite assurances that current operations will be supported for the time being, make no mistake -- THQ as we've known it is no more.
There's a certain irony that THQ -- a company whose name is an abbreviation of Toy Head Quarters -- met its fate less than a week before Christmas. Make no mistake, THQ as we've known it is no more. The name might live on -- and many of the games that were in the pipeline will likely make it to market. But even if that entity eventually proves to be a major force in the video game publishing industry at some point in the future, it won't be THQ that succeeds. It will be its offspring. Wednesday's bankruptcy filing and subsequent asset sale by the company was a confusing affair, couched in lawyer-speak and vagaries. Here's a quick look at what it means in the short term, and what it could mean in the longer term.

Dealing with big debt

THQ, as a company, has $100 million in debt hanging over it these days. It was out of cash and out of prospects, something the company all but admitted in its last earnings call when it said it was looking to evaluate "strategic and financing alternatives." With today's Chapter 11 filing, the company is hoping to deal with those obligations. A still unnamed investor, who is working through Clearlake Capital Group, has promised to fund the company's continued development of its games to the tune of $50 million. (And it's important to note that Clearlake isn't the entity buying THQ's assets. They're the corporate equivalent of a middleman.) Those companies that hold THQ's debt will get 10 cents on the dollar in exchange for forgiving the rest, assuming the bankruptcy court approves the deal. Investors who hold stock in the company? They're screwed -- and likely won't see a penny on their returns, though expect the class action suits to be filed real soon. The stock will be delisted, probably before the first week of January is over. That's standard operating procedure for NASDAQ once a company files Chapter 11. What happens after the bankruptcy process is complete, though, is anyone's guess.

Winds of change

"I don't even know we're talking about THQ anymore," says John Taylor of Arcadia Investment Corp. "We're talking about THQ's assets, but what happens to the management structure and the leadership team is certainly open to question." CEO Brian Farrell and the company's board are certainly at risk. The long struggle of THQ to find its place in a changing environment could lead to his ouster, though Taylor notes Farrell is not entirely to blame for the company's fate. "They've been hit by some serious winds of change and they had the least to work with [compared to other publishers] in terms of their portfolio," he says. More layoffs are certainly possible as well, though THQ is a pretty lean operation already. Developer pare-backs seem the least likely, though support staff is likely to be affected. The $50 million should ensure that titles like South Park: The Stick of Truth, Metro: Last Light (pictured) and the new Saints Row get completed. However, while the bankruptcy filing lists unannounced games from Vigil Games, Turtle Rock, Relic Entertainment and Patrice Desilets, the fate of most of those is less certain. The performance of South Park and Saints Row really will determine the future of son-of-THQ. Michael Pachter of Wedbush Securities notes that if both games sell in the 2.5 million-3 million range, the company should be able to survive another year or so – with a focus on Desilets' 1666 as the next tentpole. However, he notes, "if South Park and Saints Row sell 300,000 units, these investors are going to lose their money." Another unanswerable question revolves around this mystery investor's desire to stay in the video game business. If the company gets back on its feet, he, she or they may take that opportunity to put it back on the market. Or, quite possibly, they could completely change its mission. "I think the primary focus is to get games in the pipeline out the door," says Taylor. "What the process is to greenlight new production projects after that, I don't know. My guess is you're going to see [THQ] studios make a big pivot toward free to play and trying to come up with something that's relevant to the new business models out there."

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