Monday, 2 July 2012

Digi-Capital Global Games Investment Review 2012 – Q2 Transaction Update

ConsolidationVille gets bigger, faster

This article first published in GamesBeat, GamesIndustry International and PocketGamer in July 2012.

Digital investment bank Digi-Capital has just published the Q2 Transaction Update of its Global Games Investment Review 2012.

As anticipated when the Review was published earlier in the year, 2012 is proving to be a bumper year for games M&A globally. Although we are only 6 months into 2012, games M&A has already reached 88% of the transaction value of all of 2011 (the previous record year). The first half of the year has also borne out our prediction that the Zynga IPO might be the high water mark for Social Games 1.0 investment. More than ever, now looks like the time for strong independent and larger, more established games companies to consider their strategic options.

As detailed in the Review, 2011 was a record year for games M&A with 113 transactions generating $3.4B transaction value at an average transaction value of $30M. To Q2 2012, 51 transactions generated $3B transaction value at an average of $59M. The Q2 2012 run-rate for games M&A transactions is 76% higher by value but 10% lower by volume than 2011 because of fewer, larger M&A transactions. As we anticipated at the start of the year, MMO, Social/Casual and Mobile continue to dominate, and we anticipate that this trend might continue through 2012. All global games M&A transactions and public company comparables across sectors are detailed in the full Review.

As detailed in the Review, 2011 was also a record year for games investment with 152 transactions generating $2B transaction value at an average transaction value of $13M. However to Q2 2012, 73 transactions generated $481M transaction value at an average of $7M. Compared to the average run rate of games investment for 2011, to Q2 2012 transaction volume is down by only 4% but transaction value is down by 51%. Should this trend persist, games investment for 2012 might return to the still respectable levels of 2010 (the second highest year). Mobile, middleware and MMO dominated, and the change which accounts for the decline in transaction value comes from Social/Casual. In 2011 Social/Casual accounted for 57% of transaction value and 32% of transaction volume, but to Q2 2012 it accounted for 11% of transaction value and only 6% of transaction volume. So our original view that Social Games 1.0 is moving towards consolidation mode could continue to be an ongoing trend through 2012, as the VC market appears to have pulled back from its Social Games 1.0 investment of 2011.

Again as anticipated, mobile games investment accounted for 31% by transaction value and a significant 49% by transaction volume, and mobile (mobile-social in particular) might continue to be a driving force for games investment through 2012. Games middleware (and gamification in particular) generated 33% of transaction value and 18% of transaction volume. Gamified education and health appear to have become growing investment trends. The success of free-to-play continues to attract investors to MMO, accounting for 22% of transaction value and 12% of transaction volume. Chinese, Japanese and South Korean acquisition and investment continues apace in mobile, mobile-social and free-to-play MMO both domestically and internationally, and we anticipate dealflow to increasingly originate from these markets. All investment transactions and public company comparables across sectors are detailed in the full Review.

Both the dealflow we’re working on and the data we are seeing indicates that independent games companies are actively pursuing the following options by sector:

  • Mobile/tablet: fundraising (particularly mobile-social)
  • Social/casual: consolidating M&A
  • MMO: consolidating M&A (particularly from Asia)
  • Console: Strategic Review for online/mobile pivot (generally as a precursor to fundraising or M&A)
  • Games Middleware: fundraising or consolidating M&A (particularly gamification and cloud gaming)
  • Games Advertising: organic growth

Increasingly we are helping companies with Strategic Reviews prior to advising on fundraising or M&A, as industry growth and transition across sectors present many opportunities and challenges. Similarly we’re helping larger, more established companies from both within the industry and adjacent (particularly gambling companies) as they look for great independents to acquire.

We can’t wait to see what the second half of 2012 might bring!

About Digi-Capital: Digi-Capital is an investment bank focused on high growth digital companies across games, technology, media and telecoms in America, Europe and Asia (China, Japan, South Korea). Digi-Capital’s Managing Director Tim Merel will be presenting on games investment and M&A at both GamesBeat/MobileBeat in San Francisco and ChinaJoy in Shanghai in July.

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