6 Reasons why Tencent Acquired Supercell. The Perspective of an M&A Guy in the Games Industry

In a similar previous post about Why Activision Blizzard Acquired King, I suggested that additional megadeals are just around the corner…. and here we go… today Tencent announced that it will be acquiring control in Supercell at a $10.2B valuation.

Supercell also announced that they will be able to continue to operate as an independent unit under Tencent. I think this is a smart move for both sides given that Supercell is known for its unique team structure and company culture, both of which, drive their ongoing success.

The below is a “quick and dirty” review of some of the strategic reasoning that drove this deal.

Disclaimer: all opinions are my own.

So why Did Tencent buy Supercell?


To increase their global market share: Tencent is already the largest games company on the globe and even before owning Supercell their share of global market is substantial for any one company. While Tencent generated more than $8.7BN of revenues in 2015, Supercell generated $2.3BN potentially bringing them to a combined revenue of over $11BN. That’s a staggering 11% of the global games market which generated a total of $91BN in 2015.
Newzoo_Global_Games_Market_Revenue_Growth_2015-2019-1

Source: NewZoo


To increase their EBITDA: Supercell generated almost $1B of EBITDA in 2015, and we can assume that 2016 will be even a better year given the company’s growth via Clash Royal. Acquiring Supercell would add that EBITDA to Tencents financials and strengthen its financial position. Of course this benefit is subject to the financing structure of the deal itself which would bring with it financing costs. Tencents ability to make this a successful deal would rely on the fact that Supercell would be able to generate enough cash over the coming years to pay for the financing.

Capture

Source: Tencent


To become a “Mobile First” games company: Though Tencent leads the global games market, the market itself has been shifting towards mobile over the past few years. Mobile games are the fastest growing segment in the industry and are expected to generate more than 35% of global games revenues in 2016 (estimated at around $99.5B). Tencent “only” generates about a third of its games revenues from mobile platforms at the moment and the rest being mostly from web based MMOGs. With Supercell in its portfolio, the share of mobile revenues from Tencents games would be more than 50%, formally making it a mobile first company and thus on track to maintain its global leadership in the games market. The fact that engagement in Tencents MMOG’s have been in decline (probably because users are shifting to mobile) further strengthens their need to make a stronger move into mobile.

Concurrent Users in Tencents MMOGs

Concurrent Users in Tencents MMOGs

Source: Bloomberg


To diversify their risk: It’s no secret that the Chinese economy is in a general downturn. This increases the risk profile of Tencent given that it is exposed to macroeconomic market changes. Tencent is China’s largest digital company and owns many of China’s leading online platforms (QQ, Wechat, and more). As the Chinese market moves from superfast growth to slower growth revenues from online advertising, e-commerce and social networks are already affected due to “a challenging macroeconomic environment” (Tencent Financials). This trend is expected to continue in the near future. Further strengthening its non-chinese revenue by acquiring Supercell would essentially act as a move to lower this potential risk and hedge against the Chinese downturn.

Tencent Revenue Breakdown

Source: Tencent


Because they can create an upside via cross promotion in China: Supercells games are one of the only western games that has been able to top the charts in China. This proves the Supercells games have a market in China. Once Tencent will put its full weight behind Supercells games via cross promotion on its existing games and social networks in China, we can assume that Supercells games will further dominate the top grossing ranks and will enjoy from a wider distribution on China’s multiple app stores and games platforms.

Newzoo_PrioriData_Top_20_iOS_Games_July_2015_China

Source: NewZoo


To learn from the one of the best games companies in the world: Supercell is one of a handful of companies in the world that have been able to achieve such amazing success in the games industry. Generating over $2.3B of revenue with only 180 employees and only 4 games. How do they do it? What’s their secret sauce? That’s what Tencent is looking to answer and their goal will be to learn, replicate, and repeat the success in other teams within Tencent. Of course that’s easier said than done but we can assume that knowledge sharing is one of the goals of such a deal.

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Source: Supercell

Join the Playtika Biz Dev Team in San Francisco

It’s not often that I open a role in the Playtika Biz Dev team. I am looking to hire a Director of Platform Relationships in San Francisco. If you or someone you know are the rock star I’m looking for please contact me.

DIRECTOR OF PLATFORM RELATIONS

Playtika is looking for an energetic, self-learning, multidisciplinary, hardworking, Director of Platform Relations to join our Business Development team in San Francisco.

The Director of Platform Relations will report directly to the SVP Business Development located in Israel.

This role will require working in a semi self-managed environment which bring with it multiple challenges.

The candidate should be the autonomous type who is able to thrive, succeed, and conquer despite such challenges. The team member will be working from a co-op office space such as WeWork.

JOB DESCRIPTION

  1. Maintaining, managing, and expanding Playtika’s relations with platforms such as Google, Apple and Facebook
  2. Developing a deep knowledge of the platforms, their stakeholders and identifying untapped platform related opportunities
  3. Educating our global teams about current and future platform related opportunities, features, trends, and regulations
  4. Educating platform stakeholders about our business strategy and needs
  5. Liaising between platform and studio stakeholders on all platform related matters

REQUIREMENTS:

  1. Engineering or Product/Project Management related experience in the mobile or tech industry
  2. Familiarity of mobile ecosystems
  3. Familiarity with the games industry is a big plus
  4. Excellent written and verbal communication skills
  5. Strong PowerPoint & Excel skills
  6. Fluent or native English
  7. Strong time management skills with a “get things done” approach
  8. Ability to work in a cross-departmental environment across multiple time zones
  9. Willingness to travel 4-8 times a year to Playtika’s headquarters in Israel as well as other global sites

Please submit applications here

Current and Future Challenges in the Social Casino Market

A few weeks ago, I attended Casual Connect Amsterdam. This time around I tried to do something new on the stage and rather than giving an updated State of the Social Casino Industry talk, I did a fire side chat with Jeff Grub from Games Beat. We discussed the current and future challenges for the Social Casino market. We discussed topics like: the importance of content in social casino, user acquisition, market makeup, growth drivers, how smaller companies can differentiate themselves, what Playtika does dominate this market, and more. Below is the video. Hope you find it insightful.

Why Activision Blizzard Acquired King. The Perspective of an M&A Guy in the Games Industry

activision-and-king-131

As the guy leading M&A at Playtika, a deal like the Activision Blizzard / King is music to my ears. Not every day do we see such a large transaction and to be honest I get very excited when deals like this happen. I have spent some time studying and thinking about the deal and have placed some of these thoughts below. *Disclaimer: Views expressed are my own.

Some back ground first. Why do games companies buy other games companies? 

When acquiring a company there are two main goals that drive a deal. These are reducing your risk and/or increasing your financial performance. With these in mind there are multiple strategies that the acquirer can employ to achieve these goals. Some examples are:

  • Expansion of a product portfolio
  • Expansion of regional reach
  • Expansion of demographic reach
  • Creating an upside due to cross promotional potential
  • Creating an upside from knowledge sharing
  • Creating an upside from technology sharing
  • Creating an upside from operational efficiencies
  • Blocking your competition from expansion
  • Risk and upside diversification
  • Talent acquisition
  • Securing the future via a legacy pivot

These strategies are not mutually exclusive and many times they overlap.

Here are some examples of deals which employed some of the above mentioned strategies:

Playtikas acquisition of Pacific Interactive (makers of House of Fun). What were we looking to achieve by acquiring Pacific Interactive? Product portfolio expansion, creating an upside due to cross promotional potential and knowledge sharing, talent acquisition, and risk diversification. The assumption was that our players play and pay on more than one slots game at any given time and that adding an additional slots game to our portfolio would allow us to get more share of a users overall budget both in terms of time and in terms of money.

Tencents acquisition of Miniclip: Tencents goals were expansion of regional reach, talent acquisition, creating an upside via cross promotional activities and risk diversification. By acquiring Miniclip, Tencent acquired mass access to the western games market in which it was lacking prior to the acquisition.

Churchhill Downs acquisition of Big Fish:The goal behind this deal was mainly to secure the future via a legacy pivot and upside/risk diversification. By acquiring Big Fish, Churchill downs secured a position in the social casino market to which they had no previous access to, even though they are one of the leaders in offline casino entertainment industry.

So why did Activision Blizzard acquire King?

At first glance the $5.9B deal announced by Activision Blizzard and King may seem counter intuitive. The companies have quite contrasting profiles:

Activision Blizzard

  • An old-school market leader
  • Specializes in hard and midcore console and PC games
  • Specializes in the pay per download and subscription business model
  • Targets mainly a male demographic

King

  • A new-school market leader
  • Specializes in casual Facebook and mobile games
  • Specializes in the free to play business model
  • Targets mainly a middle aged female demographic

So where are the synergies? Where is the upside? How do the combined companies create value for the shareholders?

Given the contrasting profiles of both companies, in my opinion, the Activision Blizzard acquisition was mainly about a Diversification Strategy. After the acquisition Activision Blizzard will span a wider demographic (male and female), a wider product offering (from hardcore games to casualgames), a wider distribution in terms of platforms (from console to mobile), a wider knowledge base in terms of business models (pay per download to free to play). Bottom line, Activision Blizzard widened their sphere of influence and power to a substantially wider part of the games industry spectrum.

The combined company will create a games industry monster corporation with over 500M monthly active users, over $2.5B of EBITDA, and 10 of the most popular games franchises on the globe. The deal will transform Activision Blizzard into  the second largest publicly listed games company in the world (the first being China-based Tencent). This diversification and the added scale will minimize overall risk and allow the combined company to make money from the many lucrative sub-markets within the games industry.

That being said, there are several key challenges and questions in a deal like this which the combined company will face overtime:

  • Given that King is in decline (due to it’s over reliance on Candy Crush which is past its peak), will King be able to sustain and grow its core business. This is a question that has been on the mind of everyone since King IPO’d. The question remains relevant today. Many are left wondering how they will address this issue?
  • Will the combined company be able to leverage the mobile and free to play knowledge in King to allow Activision Blizzards current and future titles to succeed on mobile
  • Although there are opposing demographics between the two companies there is no doubt a sub-segment of users that overlap between the companies games. How big is this sub-segment? If substantial, how to they cross promote effectively to create an upside via increasing user LTV on a company level.

Time will tell if they are able to overcome these and many other challenges that come with such a deal. In my mind, overcoming these will be the key to whether this was a good deal at a good price.

Some other immediate considerations that were probably taken into account with the deal

Though $5.9B sounds like a hefty price, the reality is that the price is a fraction of their $25B market cap on the day prior to the deal being announced.

The Activision Blizzard stock increased several percent on the day after the deal was announced adding over $1B to their marketcap.

The $3.6B in cash that will be paid by Activision to King shareholders (the rest will be financed) is sitting overseas and thus by using these funds, Activision is essentially saving approximately $1B of taxes were the company to decide to repatriate the funds and bring them to the USA.

What does the deal mean for the industry? 

In my opinion this deal will bring with it a wave of consolidation in the games industry. If Activision can acquire King, the other mega corps will begin to think about their next large acquisitions as well. As long as the growth of the games industry continues (which I am sure it will) we will see other large deals in the coming quarters and years which will look and feel like a land grab from the days of the gold rush. We have interesting times ahead of us. Hold on to your hats!

Good luck to our colleagues at Activision Blizzard and King.

A Rare Interview with Playtika’s CEO, Robert Antokol

For those of you who follow the Social Casino niche you’ll know that Robert our CEO rarely speaks publicly. Though it took me some convincing, I was able to get Robert to speak at Casual Connect Tel Aviv.

Robert is one of the only CEO’s in the games industry that has been able to successfully build a company from the ground up – from two guys with a power-point and a big vision – to a 1200 person company with hundreds of millions of dollars of revenues, 5 hit games, and all this while maintaining a leadership position in a niche with some big and worthy competitors.  I recommend the talk below to anyone who is involved in the casual/social games industry and even more so for those who are involved in our niche.

Below is a rare interview with Robert conducted by Venturebeats Dean Takahashi where they discuss Playtika, the social casino market and some of our secret sauce.

To view an up to date market review of the social casino industry click here