Gaming industry M&A, investment booms in Q2, but IPOs ‘crash’

Despite tough economic headwinds in 2022, the year promises to be good for video game deals again, with dozens of investments, mergers and acquisitions taking place even as the sector’s IPO market has “collapsed”, according to the latest quarterly report from industrial consulting Digital development management.

Investors poured $4.8 billion into 217 deals in the second quarter, up 37 percent from the previous quarter, while the value of 59 mergers and acquisitions in the quarter exceeded $18.6 billion, up 135 percent from the previous quarter. according to DDM Games Investment Review.

“For investments, the second quarter of 2022 was the largest volume for a second quarter with 217 investments and the third highest volume of any quarter recorded in our data for more than 13 years,” the report said. “It is also the third consecutive quarter that transaction volume has exceeded 200 transactions.”

However, there are signs of a slowdown even in deal-making around the huge and red-hot $160 billion video game sector, Games Investment Review said.

While there were more deals in the first half of the year, they tended to be for significantly less per deal compared to 2021’s huge first half as the industry roared back from months of pandemic lockdowns with investment $25.5 billion in deals and another $28.5 billion in M&A deals. IPOs in the first half of last year were also off the charts, surpassing $84.4 billion in value in the first half of 2021 for 16 deals.

“Compared to the first half of 2021, investment for the first half of 2022 has more than halved, mergers and acquisitions have declined by just over 7%, and IPOs have collapsed,” the report said. “However, investment volume is up 33% and M&A is holding steady against the incredible pace set in 2021.”

For 2022, the biggest investment in the second quarter was Sony’s $2 billion purchase together with KIRKBI of a small stake in Epic Games, maker of the Battle-Royale title Fortnite and the widely used Unreal Engine, which is increasingly used for film, television and streaming video virtual productions, as well as for creating games and experiences in virtual reality/Metaverse. The Sony/KIRKBI investment valued Epic at $31.5 billion.

The second quarter of 2022 was the third consecutive quarter for top 200 investment transactions, suggesting continued interest in the sector from big-money investors amid a worsening economic climate and huge declines in both the stock market and cryptocurrencies. Among the biggest investors in the sector were Animoca Brands and Saudi Arabia’s Public Investment Fund, part of that country’s much wider push into all forms of entertainment.

The quarter’s huge increase in M&A was driven by Take-Two Interactive’s $12.7 billion acquisition of mobile publisher Zynga and many smaller deals in the growing blockchain-based games, technologies and platforms sector.

The M&A totals don’t include the big one: Microsoft’s planned $69 billion takeover of major publisher Activision-Blizzard, which was announced earlier this year. That deal remains subject to regulatory review, but remains on track to close in the first half of next year, according to Microsoft’s quarterly earnings reports last week.

The only sector not growing was initial public offerings, which declined across the economy amid the broader downturn in 2022.

“At three each for Q1 and Q2, the number of companies with IPOs has returned to pre-pandemic levels, while market capitalizations have declined significantly as these have been smaller companies,” DDM wrote.

Investment is “slower but still strong” among blockchain-based gaming companies. Blockchain-based games such as Axie Infinity

have grown rapidly, fueling great investor interest.

But the titles, many of which use a so-called play-to-win mechanism, have proven almost as controversial in some gaming circles as they have been popular. Investors still like the space, however, and their dollars provide a significant portion of the total investment pie for the quarter, 44 percent if the extraordinary Sony/BIRKBI/Epic deal goes through, according to DDM.

Of particular note, the report said, are the new ways blockchain startups are using different tactics than traditional equity investments to finance their startup costs. Increasingly, these games use token releases, NFT drops, and similar digital components and campaigns that give players little ownership or other in-game benefits to purchase.

“What was clear is that companies whose gaming projects include play-to-win mechanics, tokens and/or NFTs continue to drive investment,” the report said. “The diverse nature of their equity, token and/or NFT deals and offerings have changed the way gaming companies can raise investment, making early-stage raises easier to achieve.”

The launch of mobile publisher Jam City in late 2021 Champions: Ascension as part of a new blockchain-based development division is just one example of the trend. The company sold 10,000 NFTs of its champions to fans, who in turn get the right to help shape the lore and direction of the game when it eventually launches.

In terms of methodology, the company noted that its findings may differ from others because it considers the value of the investment rather than the resulting notional value of the receiving company when calculating its totals.