Games Dealmaking Plummets In First Quarter Amid Sliding Valuations

Dealmaking of all kinds in the $180 billion videogame sector pulled back sharply in the first quarter of 2023 “amid cautious sentiment” by investors around drooping company valuations, rising interest rates, a chilly stock market, and economic instability, according to the latest quarterly Games Investment Review by Digital Development Management.

“With reduced values across investments, M&As and IPOs, 2023 is off to a low start,” says the report, which focuses on dealmaking in “Western” markets in North America and Europe. “The first quarter reflected the economic anxiety and cautious outlook that we noted previously.”

The totals for the value and number of investments and mergers & acquisitions were collectively among the lowest in years, or ever, in the 14 years DDM has been collecting data, said DDM, which provides clients with investment services, representation, consulting and research. Only the small sector of initial public offerings rose from the previous quarter, from $300 million to $500 million, each for four IPOs.

Otherwise, it was an ugly quarter for dealmakers.

M&A, for instance, dropped from 61 deals worth $5.1 billion in Q4 of 2022, to just $400 million for 40 deals in Q1 of this year, a drop of nearly 92%. That value total comes with a big caveat, however, because DDM said 93% of those deal values were not disclosed in the latest quarter. But it was the second-lowest quarter for M&A, and third-lowest for “exits” (M&A plus IPOs) in DDM’s 14 years of data.

The high number of undisclosed deal values may be “suggesting valuations have cooled, potential down rounds, and competition tightening,” DDM speculated.

The number of investments in game-related companies remained relatively solid (144 in Q1 compared to 171 in Q4 of 2022), but the value of those investments dropped almost 41%, perhaps a symptom of eroding valuations for startups of many kinds.

Even the amount of new capital raised declined in the quarter, to $9.6 billion across 19 new funds, from Q4’s $11.3 billion across 28 new funds. For comparison, just a year earlier, 40 new funds raised a whopping $50.6 billion in Q1 2022.

There were some mild surprises in the data. All 10 of the most active investors in the industry continued to pursue opportunities in blockchain-based companies, a sign that “blockchain games remain a strong interest for investments,” the report said.

That was despite, or perhaps was fueled by, a dramatic drop in value for most cryptocurrencies and the companies creating games in that sector. Only 31% of new investment funds indicated interest in blockchain investment.

The “crypto winter“ may have created some shopping opportunities, though its prolonged nature “continues to spread fear within the market,” the report says. Investment in the sub-sector dropped 29% in value, and 31% in volume in a quarter, to $403 million across 68 deals.

Overall, DDM suggested the weak winter numbers for game investment have been further affected by difficult comps: the “Covid-bumped years of 2021 and 2022” saw massive capital inflows into the industry as investors tried to hop on a booming industry fueled by lockdowns and #WFH households.

The DDM report’s findings accord with comments last week from a number of industry investors and research analysts speaking at the L.A. Games Conference, who generally said they expect chilly conditions in game investment to continue over the next few months amid continuing economic and regulatory uncertainty.

But those insiders also predicted the markets will loosen up considerably in the fall and through 2024, driven by interest in artificial intelligence tools that could transform both the production and management of games. Interest is also shifting away from mobile gaming, where Apple
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and Android privacy changes have hamstrung the popular free-to-play economic model and related in-game advertising opportunities.

“AI is the next supercycle” in investing, said Clinton Foy of UTA.VC, the venture-capital arm of Hollywood’s United Talent Agency, during the LA Games Conference. “I think we’re going to see a raft of (deal) announcements next quarter through end of year. AI and creation is really interesting right now. Andreessen Horowitz is deploying a lot of capital in this area. Founder’s Fund too.”

Momentum should really kick in if Microsoft
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is able to complete its $69 billion takeover of publisher Activision
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-Blizzard. European Union regulators approved the deal Monday after key Microsoft concessions guaranteeing access for other cloud-based platforms to major Activision franchises such as Call of Duty.

Most international regulators have so far approved the deal, but last month the United Kingdom’s competition authority said no on concerns about the deal’s impact on the sector. Microsoft is appealing that decision.

The start of Q2 also saw announcements of two other big deals – for mobile game companies Scopely (by Saudi-backed Savvy Games Group for $4.9 billion) and Rovio (by Sega for $775 million) – that also suggest some loosening of the purse strings.

Going forward, investment values may be driven by newer players in the market, including Hollywood media companies seeking growth opportunities now that their subscription streaming ventures are hitting growth and spending limits.

Big tech firms such as Apple and Alphabet that have significant game-related assets also have many tens of billions of dollars in cash on hand, and very little debt, so they could afford even very big deals, panelists said. And finally, though Chinese companies have pulled back their international deal-making, new Saudi-backed firms are aggressively entering the entertainment and game markets.