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Over the past 24 years in gaming (since Jan 1st, 2000), there have been 175 M&A transactions that exited for greater than $100m in value (32 of these for over $1b, and 12 of them for over $3b). In the public markets, 51 gaming companies have IPO’d over this same time period at market caps greater than $100m, 21 of them for over $1b, and 11 of them for more than $3b (Data from CB Insights). The last 24 years have certainly been transformative, active, and lucrative for the gaming industry (now at 3.3b gamers and ~$190b in annual revenue).
Looking ahead, we believe that in the second half of 2024, we will see a few notable gaming IPOs. On the M&A side, we expect that the next most notable acquisitions in gaming will happen in 2025 or 2026. Below we briefly walk through the macro environment’s impact on gaming, the gaming IPOs to watch most closely, and the M&A landscape around gaming assets.
The Macro’s Impact on Gaming
While not immune, the gaming industry is resilient to the macro environment, especially in regards to exit paths via M&A and IPO. Here are a few points that highlight the negative and positive impacts of the macro backdrop:
Positive signals:
- Growing user base: For the past decade, gaming has added north of 100m gamers each year, in some years as high as 170m. With continued population growth, internet and mobile penetration in emerging markets, and lowering of the barriers to entry, we expect this trend to continue.
- Expanding pool of acquirers: IP holders are increasingly moving into gaming as a way to increase consumer retention, add revenue lines, and access younger generations like Gen Alpha (i.e. Disney, Netflix, Meta, movies, shows, etc).
- Resilient propensity to spend: Consumer discretionary spending is resilient in the entertainment category and particularly in gaming, player engagement tends to be inversely correlated with tougher market conditions (Gaming: Is it Recession-Proof?).
- Strong cash balances: Gaming corporates have $35b in cash and tech companies with gaming strategies have $267b in cash (not all for gaming, but it is reasonable to assume at least some of that will be invested in their gaming strategy via organic growth or M&A).
Negative signals:
- Higher interest rates for longer: These rates are depressing multiples in both the public and private markets. Higher rates are directly correlated to lower EV/NTM revenue multiples in the SaaS market (as depicted below). Gaming is in lockstep with the compression of valuation multiples we are all witnessing, which impacts both IPO and M&A transactions.
- Declining private funding: Private funding for the gaming industry has dropped from $14.8b in 2021 to $2.7b in 2023. It is on track to stabilize this year in 2024, but likely in the $3-4b range, which means that many in the current cohort of gaming companies are being forced into difficult decisions as we speak (cutting costs, raising down rounds, seeking M&A opportunities, etc).
- Data privacy restrictions on advertising: IDFA changes have resulted in the cost-per-install (CPI) to rise substantially for gaming studios, making marketing costs either completely unattainable or economically not viable for many/most studios in the mobile gaming industry. This has resulted in consolidation, upside down business models, and a lot of struggles in mobile (especially the free-to-play market).
Gaming IPOs
In VC since 2010, 48% of all unicorns have found their exit via the IPO market. Of the unicorn cohort today, this implies that ~350 US VC-backed unicorns alive today may exit via IPO (Silicon Valley Bank). Looking at the current IPO environment, according to Goldman Sachs, the start of 2024 in the US IPO market is the fastest start to the year since 2015 (excluding 2021, which was an anomaly).
In the second half of 2024, there are two things to watch in regards to gaming IPOs:
1) Potential IPO targets to watch: Currently, there are 54 active gaming companies that have raised over $100m in total funding who are still operating and have not exited. Of these 54 companies, 21 companies have raised over $250m in total funding and investors in those companies are certainly asking about the path to liquidity for these names (Data from CB Insights).
The chart below is from our latest Gaming Industry Report for Q1 2024. The gaming companies that we think are most likely to go IPO in late 2024 include: Discord, Niantic, Moon Active, VNG Games, and Smilegate.
Like many tech companies in line to IPO, they are waiting for improved multiples as well as right-sizing the business model to be more profitable. The latter is well underway, yet the “waiting for multiples to rise” might not be possible given that rates are staying higher for longer. This is the new normal, better to go now than wait another 3-5 years and lose that time value in the process.
Additional leadership commentary around IPO: Epic Games; Discord; Niantic; Moon Active; VNG
The key companies in gaming to pay attention to are Tencent, NetEase, and Bytedance (TikTok). Each of these companies have close ties with the Chinese Communist Party (CCP), with Tencent having a market cap of $418bn USD and owning Riot Games (League of Legends, Valorant) and a very large stake in Epic Games (Fortnite, Rocket League). Riot is based in LA and Epic is based in North Carolina. These game are played by over 100m American citizens, which is the same major premise for why TikTok is being banned or forcibly divested. As multiplayer online games like Fortnite and League of Legends have taken on community and social characteristics similar to social media, the data exposure and foreign influence risk is comparable.
The backdrop for M&A in gaming is healthy, showcased below by gaming corporates who have $35b in cash (excluding any type of financing or stock purchase element in the deal which has become increasingly more expensive due to rate increases). Additionally, gaming has become a core priority or initiative at many of the largest tech companies in the world (Amazon, Meta, Apple, Tencent, Google, Netflix, and of course Sony and Microsoft). These companies have $267b on the balance sheet, which inherently positions them well as a buyer of gaming assets.
Regulatory headwinds from the FTC: The reason why we believe that significant and meaningful M&A (>$500m in a single transaction) is unlikely to happen until 2025 is due to the prohibitive regulatory environment that the FTC has fostered.
The FTC lost their fight against Meta’s acquisition of VR startup Within (rumored at ~$400m) and they just lost a very public and globally contentious legal battle in their efforts to block the $68b MSFT / ATVI acquisition. While both attempts in gaming failed, the FTC was successful at applying enough pressure to break up Adobe’s $20b acquisition of Figma, which resulted in Adobe paying a $1b breakup fee to Figma.
Based on these recent reactions from the FTC, the current regulatory environment is arduous and unfriendly to sizable M&A transactions (something we feel will continue under the current administration). This is why we believe that large-scale M&A in gaming is unlikely until 2025/2026, even though the fundamental backdrop for deal making is incredibly healthy.
Takeaway: We expect 1-2 notable gaming IPOs to occur in the second half of 2024 (watch list: Discord, Niantic, Moon Active). Given the suppressive regulatory environment, we believe that large-scale (>$500m transaction size) M&A in gaming is unlikely until 2025/2026. In gaming’s financial markets, while there are many positive signals for the industry, the current macro environment of higher rates for longer puts pressure on IPO price expectations, business model profitability, and M&A exit values/financing options.
