Why Indie Game Developers Are M&A Targets and How to Start Preparing for a Sale
Article

Why Indie Game Developers Are M&A Targets and How to Start Preparing for a Sale

November 18, 2021

If you’re an indie gaming company, the world is now your oyster. Here’s why this may be a uniquely opportune time to sell your company — and what you’ll need to have ready for a potential buyer so you get the most out of the deal for you and your team.

Why Indie Gaming Companies Are Hot Acquisition Targets

As an indie game developer, you have your thumb on the pulse of what real gamers view as a quality game. You understand what makes your games great versus those produced by large, mainstream development companies. With 2.5 billion active gamers around the world, the largest gaming companies are hungry to provide unique content to their customers.

If you’ve considered selling your company, it helps to have a clear understanding of why small or midsize game developers have become so appetizing to investors over the last 18 months. There are three main reasons.

1. Gaming is experiencing tremendous growth, and it’s likely to continue.

With the onset of the COVID-19 pandemic came a major spike in consumer spending on at-home entertainment, with gaming outpacing movies and music combined. Microsoft alone increased its quarterly gaming revenue by 51% as of December 2020. Video game sales have experienced exceptional growth across the board, and the trend has continued into 2021.

Total U.S. consumer spending on gaming for the first seven months of 2021 was up 14% year-over-year (YOY), reaching $33.5 billion, according to research firm The NPD Group. And the global gaming market is set to reach $257 billion by 2025, according to Mordor Intelligence, up from around $152 billion in 2019.

These numbers indicate that gamers will continue to want games, which means small and midsize developers are in a position to earn large sums for their creations.

2. The increase in money supply in the U.S. economy is spurring more M&A.

During the second half of 2020, leaders of large gaming companies began to understand that consumer preferences were changing rapidly. They realized the importance of acting quickly to acquire new offerings that would align to the reality that people are spending more time at home and buying more games. This realization was combined with the Federal Reserve’s monetary stimulus and inexpensive financing, leading to a dramatic increase in M&A activity compared to pre-pandemic years:

  • According to the Q2 2021 DDM Games Investment Review Report, gaming industry M&A hit a record high in 2020 with 220 deals (+32% YoY) worth $11.3 billion.
  • In addition, 2021 is on pace to double the 2020 record for gaming industry M&A, with $25.4 billion in M&A recorded in the first half alone.

The large gaming corporations have access to inexpensive capital at levels that have never been seen before, resulting in their ability to pay lofty valuations for content that has already achieved a strong player base.

3. Big game publishers have an original content strategy that’s driving studio acquisitions.

During the early days of the “cord-cutting” era, when consumers were cancelling memberships to traditional cable in favor of streaming services, Netflix understood the importance of producing its own content in-house. Today “Netflix Original” movies and shows command some of the highest viewership on the platform and are a core reason why Netflix continues to grow and charge a premium compared to its competitors.

This concept of producing original content to drive brand value has migrated to the video gaming industry. Large gaming companies want to be able to market top-selling games as being produced in-house. Due to the enormous up-front cost and time required to create games, it is much more advantageous for these large companies to add unique content to their libraries via acquisition.

A recent example of this is Epic Games’ acquisition of Tonic Games Group, the parent company behind Fall Guys: Ultimate Knockout, a family-friendly game that went viral during 2020. On announcing the deal, Epic said it needs “great creative talent who know how to build powerful games, content and experiences” — a statement that captures the motivation large publishers have to acquire smaller, imaginative game developers.

How to Set Yourself Up for M&A Success

If you are a gaming company that has achieved a significant following of “true gamers,” a partnership with a large gaming corporation via a sale could be the next step that both provides the founders with capital that could be used elsewhere and can set the infrastructure in place for your game to reach global success.

Here’s what prospective buyers will want to see:

  • Audited financials, which require accounting systems and internal controls that are well documented so that a third party can confirm the historical financials are accurate and in accordance with generally accepted accounting principles (GAAP)
  • A financial forecast model with a detailed profit and loss, balance sheet and cash flow projection going three years into the future
  • A comprehensive pitch deck outlining why your company can provide investors with appetizing returns
  • An internal valuation of your company based on a financial forecast model and comparable transactions
  • A finance and accounting team (in-house or outsourced) that can do all of the above and speak eloquently to investors around differences in valuation, deal structure and capital needs

The consequences of not having the above can include selling your company for less than it is worth, not being able to close a deal or attract investors, and achieving the right valuation but not the right capital structure (cash vs. equity).

Now is the time to begin planning for the deal that may exist in your near future. Having the right elements in place before you enter the M&A process will help you avoid the above consequences and leverage this opportune time to sell your gaming company for what it’s worth.

Considering an acquisition deal? Reach out to our gaming industry experts to begin a conversation about how to navigate the M&A process and optimize your results.

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