The Invisible $2.8b Company

Keywords Studios Bought for $2.8b

EQT, Temasek, and Canadian Pension Plan (CPP) announced their pending acquisition of Keywords Studios on July 3, 2024, taking the company private off the London Stock Exchange. These companies will own 51%, 24.5% and 24.5% of Keywords respectively, marking the 22nd acquisition in gaming over the $1b mark (CB Insights). 14 of these 22 acquisitions occurred over the past five years (2019-2024), as entertainment and technology giants have moved aggressively into the gaming sector. Now we are seeing an increasing number of financial juggernauts acquire prominent assets in gaming as well. As the outsourcing market in games remains fragmented and riddled with rollup opportunities, we believe the acquisition of Keywords Studios was a well-timed and lucrative decision.

The History of Keywords

Keywords Studios often operate within the shadows of game development across a myriad of development services. Many of our readers may never have heard of them prior to the acquisition announcement. Keywords Studios commands an impressive client list, having worked on games for most major publishers including Activision Blizzard, Bandai Namco, Bethesda, Electronic Arts, Epic Games, Konami, Microsoft, Netflix, Riot Games, Square Enix, Supercell, Tencent, Ubisoft, and others. Their story has been slowly building over the last 26 years.

Chapter 1: Founding

Keywords was founded by Giorgio Guastalla and his wife Teresa Luppino in 1998. Guastalla, a Microsoft-alum, founded Keywords for the purpose of providing localization services for business software. At the time, their localization services typically involved customizing language, graphics, audio and other elements to match cultural preferences. The company first started exploring localization services in video games in 2004 and have since become the market leader in nearly all outsourcing functions.  

Chapter 2: Aggressive Growth

Andrew Day took over as CEO in 2009. At the time, it was still a relatively small operation with less than 50 employees. He led the company for over 12 years before stepping down in 2021. During his 12 year tenure, Day took the company public on the London Stock Exchange in 2013, built the company to a team of 9,000 employees across 22 countries, and acquired over 50 companies totalling nearly $100m in transaction volume. Day spearheaded the growth of the company from €16m in top-line revenue to €512m in 2021, the year of his departure.

Chapter 3: Scaling

Bertrand Bodson took over as CEO at the end of 2021. Prior to joining, Bertrand was an alumni of BCG and Amazon, led the online transformation of Sainsbury’s Argos, and oversaw the digital transformation of the Novartis business. At first glance, his resume did not make sense to many in the games industry; however, he has proven to be an excellent leader driving continuous growth. Bodson focused the company on doing less (but larger) acquisitions, the most notable being: 1) The Multiplayer Group for $97m and 2) Digital Media Management for $100m (CB Insights). In 2023 alone, Keywords spent €225m on M&A, over 2 times what was spent from 1998-2021. Bodson grew revenue from €512m in 2021 to €780m in 2023, +52% revenue growth in two years and grew the company size from 9,000 to 13,000 (CB Insights).

The Outsource Market of Video Gaming:

It can be helpful to think of an outsourced game studio as a general contractor for a construction project. There are some core competencies that merit a team of full-time employees, and there are roles that are crucial to have in-house; however, for many roles, it makes the most sense to use a subcontractor. Game development often leverages many subcontractors, spanning across multiple disciplines such as art, design, testing, quality assurance, audio production, support and maintenance. The main reasons games choose to outsource are 1) cost efficiency, 2) access to specialized talent, 3) scalability, and 4) a faster time to market. Nearly every major game today has leveraged a multitude of outsource development groups.  

According to Keywords Studios, in 2023, $38b was spent in video game content creation; 66% of this was internal investment and 34% of this was spent on outsourced external content creation. It is estimated that video game content spend will grow 8% annually over the next five years while external services specifically will grow 9% annually over the same period. This would result in $36b invested internally and $20b invested externally annually in video game content creation by 2028. 

The Future Opportunity for Keywords Studios:

1. Fragmented Market: Keywords Studios is the clear market leader in outsource development; however, they currently only command a 6% market share of the outsourcing market, or $780m of a $13b industry. 
2. Growing Market: Outsourcing in games is set to increase from $13b to $20b over the next 5 years. It is also projected to increase its share of total content spend from 34% to 37%.
3. Limited Interested Acquirers of Competitors: Unlike games themselves, there are not as many interested large acquirers for the predominantly services businesses such as those that Keywords Studios has successfully rolled up. Keywords Studios will continue to be the “100-pound gorilla” in the room able to make inexpensive acquisitions, as few other large organizations will find their targets as accretive.  
4. Difficult Funding Market: Funding in the gaming industry was down 20% QoQ, dropping to $492m in Q2 2024 (CB Insights). A lack of private funding options paired with teams in desperate need of liquidity presents many options for the companies with strong capital arsenals on the Keywords Studios’s cap table: EQT ($227b AUM), Temasek ($389b AUM), and CPP ($575b AUM).

Takeaway: The outsourcing market of video games remains incredibly fragmented; Keywords Studios is 3 times the size of their next largest competitor while only commanding 6% of the outsourcing market. The white space in this market, paired with the growth of the video game outsourcing TAM from $13b to $20b over the next 5 years, points toward an exciting opportunity for this market leader. These tailwinds, a strong cash position, and well-funded partners on their cap table (~$1.2 trillion in AUM) put Keywords Studios in a strong position for the future.

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