Games Industry Dealmaking Poised To Bounce Back After Brutal Year Of Decline

It’s been a difficult last 12 months for dealmakers everywhere, but particularly in the formerly red-hot video-game sector, as higher interest rates, an uncertain regulatory climate, cryptocurrency crackdown, and other issues choked off most IPOs and mergers & acquisitions.

That bad news continued in the second quarter of 2023, according to the latest industry report from Digital Development Management, which advises game industry publishers, investors and others.

“Over the last year, the games industry withstood macroeconomic headwinds of high inflation and recession fears, a prolonged crypto winter, bank failures, and slower global economic growth,” the company said in its latest quarterly report. “As a result, games investments and M&As in Q2 2023 have marked four quarters or a full year of decline in value and volume.”

The first half of 2023 was the sector’s weakest since 2016 for M&A, initial public offerings and other game-related investments, DDM said.

Total investments dropped by a third between Q1 and Q2, to $700 million on 126 deals. M&A transactions dropped 81%, from an already minuscule $600 million in the first quarter to just $100 million on 31 deals in the second quarter. And the decline in initial public offerings was even more drastic, falling 97.5% to just $10 million in market capitalization raised in a single IPO.

Investor groups have also seen big drops in the cash they’re collecting, raising $7.8 billion in the quarter, down 18% in value compared to Q1. That suggests “funds are having a tough time raising capital in the current market,” the report says.

The fundraising situation is further complicated by the U.S. Securities & Exchange Commission’s crackdown on blockchain and cryptocurrency companies. During the go-go period between 2020 and 2022, crypto-related game investments were a major source of investment in the sector, and remain an area many game executives continue to explore.

Investing in that sector is continuing, but the value of funds invested there has dropped by half, according to DDM.

“While blockchain is still obtaining interest from investors, Q2’s $1.7B across 10 funds resulted in a further decline in capital raised when compared to Q1’s $3.4B across 6 funds, showcasing that blockchain investors may be hedging their exposure during blockchain regulation uncertainty,” according to the report.

The report does have some good news, or at least a strong forecast, as DDM predicts ”2023 could bounce back with a record-breaking” second half.

Leading the revival is that massive Microsoft
MSFT
deal to acquire one of the industry’s biggest publishers, Activision-Blizzard, for nearly $69 billion. The deal has been held up by regulator reviews in multiple countries, and still must satisfy objections raised by Great Britain’s Competition and Markets Authority.

But Microsoft now looks positioned to satisfy those concerns and close the acquisition perhaps as soon as this quarter, which would make it the biggest acquisition in video game history.

It’s not the only big deal on tap already on tap for the second half of 2023. Savvy Games Group has already closed its $4.9 billion acquisition of big mobile games publisher Scopely this quarter.

And for all the chilly investment climate, 2023’s Q2 was still third-best in DDM’s decade and a half of tracking the industry, at least in terms of the number of deals, if not their value. No surprise, the two best second quarters on record were in 2021 and 2022, DDM said.

More generally, M&A and investing is continuing at a historically solid pace, but with far smaller per-deal average values, according to DDM’s figures. That suggests a tougher fundraising climate for entrepreneurs and startups, but a willingness by investors to continue to make small(er) bets in the sector. The firm suggested investors are still open to making deals but are bargain hunting.

Aonic Group and Atari were the quarter’s most active acquirers, with two deals apiece.

The quarter’s only IPO was Polish developer and service provider VRFabric, which debuted on the NewConnect exchange with an $11.4 million market capitalization. The single IPO represents the third-quietest quarter in DDM records, going back to 2010.

The DDM data only includes publicly disclosed deals, and are counted only once the deal closes, rather than when it is announced. DDM also noted that only tracks “Western investments that span development, publishing and technology across PC, console, mobile, browser, mass community (MMO, MOBA, battle royale, metaverse), blockchain, eSports and AR/VR games.

All of that makes the quarterly report a substantive but not quite comprehensive gauge of the state of the games business. The full report is available here.