GCDC: What Determines Developer Acquisition Values?

Author: by Mathew Kumar, Leigh Alexander

In the current climate where consolidation is often an inevitability, many small studios aim to build their value in such a way as to position themselves for a lucrative pickup by a larger company. Acquisition values vary greatly, though -- for example, Warner paid $120 million for LEGO Star Wars developer Traveller's Tales, while Take-Two allegedly only paid about a tenth of that price two months later to acquire Illusions Softworks, even though the number of employees was identical. Dan Lee Rogers works for ISM Agency helping developers with business strategy, and, discussing this issue at GC Developers Conference in Leipzig, which Gamasutra attended, cites many other similar situations. The Precedents "In 2002 Angel Studios was sold to Take Two for 28 million dollars," recalls Rogers. "That same year Luxoflux was sold to Activision for 9 million dollars, and if you look at those two companies, they were very similar in size, very similar in success, yet one was sold for three times of the other." Just their work on the Matrix franchise made Shiny worth $47 million to Atari, says Rogers, while Vancouver-based Black Box, despite being "more efficient [and having] a more dependable output," only set Electronic Arts back $14 million -- according to his figures. Why, asks Rogers, did Rare sell to Microsoft for $375 million? Why, exactly were BioWare and Pandemic sold to EA for $775 million? Trendwatching Looking at major industry events, says Rogers, there may be some trends. There is a sudden spike, he says, in acquisitions after the release of the PlayStation, as its success caught many studios by surprise, sending them scrambling to pick up dev talent in a hurry. Similarly, a "huge ramping-up" of acquisitions could be seen ahead of PS2's release, he says. After the Xbox launched, there was a similar "huge jump," says Rogers. "People really didn't know if the Xbox was going to take off -- I can postulate that one of the reasons that Microsoft purchased Rare for $375 million was to answer that question." Now that many of the desirable studios have been, as Rogers says, "gobbled up," the current climate sees fewer acquisitions than ever. But independent developers are still well-positioned. Publishers are focused solely on profit, he says, and in offering greater value to their shareholders. So rule number one is to keep in mind that acquiring companies don't think like development studios, says Rogers. Rules of The Game Rogers advises indies hoping to build value for an acquisition to "think like a publisher," looking ahead to new technology and trends such as iPhone games to start prepping ahead of the curve. Rule number two: " You are not the center of a publisher's universe," Rogers says. "You have to realize that when the producer from the publisher is talking to you about your game they're not only thinking about the possibility that you're going to ask for more money, but they're also worried about having to go back to the publisher with that news and then lose their job." Rule number three, says Rogers, is that publishers buy developers not out of want, but out of need. There are a few different categorical reasons, he suggests, why publishers make acquisitions: Development expertise, franchise or IP acquisitions, or strategic acquisitions. Sometimes, it's twofold: "For example, when Activision purchased Vicarious Visions, it was to claim the development expertise, which also allowed them to deny their opponents the same expertise -- Vicarious Visions was a very successful developer for a number of publishers at that time." New business models might bring a fourth sort of strategy to the forefront -- patent and patent technology-motivated acquisitions, Rogers predicts, citing the $175 million acquisition of Harmonix by MTV at least partly to gain music game patents. "One of the interesting things I think we're going to see in the next 10 years is patent and patent technology acquisition strategy - as seen as part of the reason for the acquisition of Harmonix in 2006 for their music game patents." Publishers may also choose which studio they acquire based on desired market position (or strengthening an existing one), increasing profit and motivating shareholder confidence. The strategic acquisitions tend to pull down the largest dollar values, says Rogers. How does that information help studios hoping for a big-figured deal? More Than Just More Bodies "Publishers base their value of your company on what they perceive your revenue stream may be, on the value on the software you may have built, on the value of your IP/franchises, and your employees and asset values," Rogers explains. Bigger's not always better, though -- for example, publishers focus on production values per employee, not so much the number of employees. Although the latter does contribute to overall value, "watch out for a point of diminishing return on employees - past a point of about 250 you begin to lose a targeted expertise. Publishers are not interested in just getting more bodies." Liabilities like debt, legal battles, real estate or other long-term contractual obligations, can knock down a studio's worth in a publisher's eyes. "To increase your value, look at your revenue streams, your intellectual property, your real property, and your employees," Rogers advises, recommending that ultimately studios who want to sell should be conscious of their role in the space and of what type of value they offer to whom. [Rogers also examined this issue in an extensive Gamasutra feature back in 2004.]