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Mergers and acquisitions in the gaming industry, investment still booming in Q2, but IPOs ‘collapse’ amid economic downturn

Despite the tough economic headwinds of 2022, the year again promises to be a good one for video game deals, with dozens of investments, mergers and acquisitions occurring even as the IPO market of the sector has “collapsed,” according to the latest quarterly report from industry consultancy Digital Development Management.

Investors invested $4.8 billion in 217 deals in the second quarter, up 37% from the previous quarter, while the value of 59 mergers and acquisitions during the quarter topped $18.6 billion, up 135% from the prior quarter, according to DDM Games Investment Review.

“For investments, Q2 2022 is the highest volume for a second quarter with 217 investments and the third highest volume for any quarter recorded in our 13+ years of data,” the report said. “It is also the third consecutive quarter where the volume of transactions exceeds 200 transactions.”

That said, there are signs of a slowdown even in transactions around the huge, red-hot $160 billion video game industry, Games Investment Review said.

Although there were more deals in the first half of the year, they tended to be much lower per deal compared to the gigantic first half of 2021 as the industry roared through the months of pandemic lockdown with $25.5 billion in investment deals and an additional $28.5 billion in M&A deals. IPOs in the first half of last year were also off the charts, topping $84.4 billion in value in the first half of 2021 for 16 deals.

“Compared to the first half of 2021, investments in the first half of 2022 are more than halved, mergers and acquisitions are down just over 7% and IPOs have collapsed,” the report said. “However, investment volume increased by 33% and mergers and acquisitions remained stable compared to the incredible pace set for 2021.”

For 2022, the biggest investment in the second quarter was Sony’s $2 billion purchase alongside KIRKBI of a small share of Epic Games, creators of the battle royale title. Fortnite and the widely used Unreal Engine, increasingly used for virtual film, television, and streaming video productions, as well as for creating games and virtual reality/metaverse experiences. The Sony/KIRKBI investment valued Epic at $31.5 billion.

The second quarter of 2022 was the third consecutive quarter to reach the top 200 in investment deals, suggesting continued interest in the sector from large investors amid a deteriorating economic climate and huge declines on the both the stock market and cryptocurrencies. Among the biggest investors in the sector were Animoca Brands and Saudi Arabia’s Public Investment Fund, which were part of that country’s much broader push towards all kinds of entertainment.

The huge increase in mergers and acquisitions in the quarter was driven by the acquisition of mobile publisher Zynga by Take-Two Interactive for $12.7 billion and by much smaller deals in the growing games sector , blockchain-based technologies and platforms.

The M&A totals don’t include the big one: Microsoft’s planned $69 billion takeover of major publisher Activision-Blizzard, which was announced earlier this year. That deal continues under regulatory review, but remains on track to close in the first half of next year, according to Microsoft’s quarterly earnings announcements last week.

The only sector that did not increase was initial public offerings, which declined across the economy amid the broader 2022 downturn.

“At three each for the first and second quarters, the number of companies with IPOs returned to pre-pandemic levels, while market capitalizations fell significantly as they were all small companies” , DDM wrote.

Investments are “slower but still strong” among blockchain-based game companies. Blockchain-based games such as Axie Infinity

AXS2
have experienced rapid growth, attracting the interest of investors.

But the titles, many of which use a so-called “play to win” mechanic, have proven almost as controversial in some gaming circles as they are popular. Investors still love space, however, and their dollars provided a sizable slice of the quarter’s overall investment pie, 44% if the aberrant Sony/BIRKBI/Epic deal is pulled, according to DDM.

Of particular note, according to the report, are the new ways blockchain startups are using different tactics than just traditional equity investments to fund their start-up costs. Increasingly, these games leverage token releases, NFT drops, and similar digital components and campaigns that give players a bit of ownership or other in-game perks for purchase.

“What is clear is that companies whose gaming projects incorporate game-to-win mechanics, tokens, and/or NFTs continue to drive investment,” the report said. “The varied nature of their stock, token, and/or NFT offerings and offerings has changed the way gaming companies can increase their investments, making early increases easier.”

Launch in late 2021 by mobile publisher Jam City of Champion: Ascend as part of a new blockchain-based development division is just one example of the trend. The company has sold 10,000 NFTs of its champions to fans, who in turn are entitled to help shape the lore and direction of the game when it launches.

In terms of methodology, the company noted that its findings may differ from others because it counts the value of the investment, not the resulting imputed value of the recipient company to calculate its totals.

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