Four Reasons for the Gaming Industry's High Valuations and M&A Activity

 |  Includes: EA, NWS, TWX, VIA
by: Bruce Everiss

There has been a lot of game development company takeover activity recently. And some of the prices paid are very interesting indeed. Traveller's Tales, a 200 staff development studio went to Warner Brothers (A division of (NYSE:TWX)) for $200 million. And they don’t even have a mountain of IP, not that Warner need any more. Pandemic/Bioware went to Electronic Arts (ERTS) for $860 million, this time definitely for their IP.

And there is a lot more happening at the moment. NCsoft bought a lot of development assets from Cryptic studios as well as the IP for City of Heroes. Ubisoft bought Digital Kids. And EIDOS is currently negotiating for their own sale. All this at a time of tightening money.

Why so much activity and why such high values (a lot of this has been discussed here before)?

Firstly, there is the effect of industry consolidation. Economies of scale are such that we are moving to having only a handful of general global game publishers. The small ones cannot survive unless they are niche players. This is the same as happened in film and music. You cannot beat such powerful economic forces. (Unless digital downloading takes off.)

Secondly, we have the big global media companies either moving into gaming or vastly expanding their stakes in the industry. Warner Brothers, News Corporation (NASDAQ:NWS) and MTV (NYSE:VIA) have all made significant recent moves. They have no option as gaming continues to grow to become the dominant media. The advantages of interactivity, connectivity and non linearity make older media look limited and obsolete.

Thirdly, the numbers are looking amazing. This industry currently does $33 billion of business a year, this will increase to $47 billion by 2009, a 40%+ increase in just 2 years. Very few other industries are expanding at this rate. It is incredible that the Wii continues to be constrained by manufacturing capacity and sells secondhand at a premium.

Fourthly, the industry is very resilient to (the coming?) recession. People give up their entertainment last, as was proved by the movie industry in the great depression.

This really is a golden industry at a golden time. Acquisitions will command a premium because the future value will be so enormous.