Game Industry M&A, Investments Boom In Q2 But IPOs ‘Collapse’

Despite 2022’s difficult economic headwinds, the year is again promising to be a good one for video-game dealmaking, with dozens of investments, mergers, and acquisitions happening even as the sector’s IPO market has “collapsed,” according to the latest quarterly report from industry consultancy Digital Development Management.

Investors put $4.8 billion into 217 deals in Q2, up 37 percent from the previous quarter, while the value of 59 mergers & acquisitions in the quarter topped $18.6 billion, up 135 percent from the previous quarter, according to the DDM Games Investment Review.

“For investments, Q2 2022 is the highest volume for a second quarter at 217 investments and third-highest volume for any quarter on record in our 13+ years of data,” the report says. “It is also the third consecutive quarter where deal volume has exceeded 200 transactions.”

That said, there are signs of slowing even in dealmaking around the huge and red-hot $160 billion video game sector, the Games Investment Review said.

While there were more deals in the year’s first half, they tended to be for considerably less per deal compared to 2021’s mammoth first half of 2021, as the industry roared out the pandemic’s lockdown months with $25.5 billion in investment deals, and another $28.5 billion in M&A transactions. IPOs the first half of last year were similarly off the charts, topping $84.4 billion in value during the first half of 2021 for 16 deals.

“Compared to the first half of 2021, H1 2022 investments are more than halved, M&As are down by a little more than 7%, and IPOs have collapsed,” the report says. “However, the volume of investments is up 33% and M&A have held steady from the incredible pace 2021 set.”

For 2022, the second quarter’s biggest investment was Sony’s $2 billion purchase alongside KIRKBI of a small share of Epic Games, maker of battle-royale title Fortnite and the widely used Unreal Engine, increasingly employed for film, TV and streaming video virtual productions, as well as for creating games and virtual-reality/Metaverse experiences. The Sony/KIRKBI investment valued Epic at $31.5 billion.

Q2 2022 was the third consecutive quarter to 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 the Public Investment Fund of Saudi Arabia, part of that country’s much broader push into all kinds of entertainment.

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

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

The one sector that hasn’t been growing is initial public offerings, which have tailed off across the economy amid 2022’s broader downturn.

“At three each for Q1 and Q2, the number of companies having IPOs have returned to pre-pandemic levels, while market capitalizations are significantly down as these were all smaller companies,” DDM wrote.

Investments are “slower but still strong” among blockchain-based game companies. Blockchain-based games such as Axie Infinity AXS2
have grown quickly, feeding plenty of investor interest.

But the titles, many of them using a so-called “play-to-earn” mechanism, have proved nearly as controversial in some gaming circles as they are popular. Investors still love the space, however, and their dollars provided a significant chunk of the quarter’s entire investment pie, 44 percent if the outlier Sony/BIRKBI/Epic deal is taken out, according to DDM.

Of particular note, the report said, are the novel ways blockchain startups are using different tactics than just traditional equity investments to fund their startup costs. Increasingly, these games are leveraging token releases, NFT drops, and similar digital components and campaigns that give players a bit of ownership or other in-game benefits for buying in.

“What has been clear is that companies whose gaming projects incorporate play-to-earn mechanics, tokens, and/or NFTs continue to drive investments,” the report says. “The varied nature of their deals and offerings of equity, tokens and/or NFTs have changed how gaming companies can raise investments, making early-stage raises easier to achieve.”

Mobile publisher Jam City’s launch at the end of 2021 of 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 counts the value of the investment, not the resulting imputed value of the receiving company in figuring out its totals.