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EGD Special: 2020 in Review with InvestGame

EGD Special: 2020 in Review with InvestGame

This is a recording from a webinar that I did with Anton Gorodetsky and Sergei Evdokimov from InvestGame.net and we reviewed gaming’s investment, M&A, and IPO landscape from 2020 and shared our predictions on what will happen in gaming during 2021.

Transcript of the episode

Joakim Achren 3:42

I’ll give it a floor now to Anton and Sergey. So please take it from here. And before we start, can you do a short introduction on InvestGame for folks that haven’t heard about you before?

Sergei Evdokimov 4:21

My name is Sergei. I’m a co-founder of the platform, which tracks deals around the world or related to the gaming industry called InvestGame.net. Also working as an investment associate at MY.GAMES venture capital fund. So kind of my hobby that I’m doing on a sustainable basis.

Anton Gorodetsky 4:51

Yeah, my name is Anton and I also work for MY.GAMES. And yeah, I’m also a co-founder of InvestGame. And that’s what we do as a, you know, side hustle. I would call it that. So yeah, what we do is we, on a daily basis constantly track all announced deals in the gaming market. They are early and late-stage deals, M&A, public offerings, like everything that is of interest in terms of the gaming deals in the world and the whole world. Yeah. We also collect that about the most active gaming funds and strategic investors with deal types value and focus. So all of this data is presented on InvestGame.net, you may go check it out while you watch our Stargate co do continue.

Sergei Evdokimov 5:49

Yes. So in addition to this, we also you know, trying to make some articles on a weekly basis, covering the most interesting deals from our perspective, and also sending on a weekly basis, our digest, which you can subscribe to, and get some additional insights about the market and our thoughts regarding the valuation, the future and some predictions and strategies of the gaming companies.

Sergei Evdokimov 6:17

So I think that we can move on to the findings of our report that we have made for 2020. Before we move on, I would love to actually thank our team, because they’ve been working very hard. And it’s not only us together with Anton, we also have something behind it. And the guys were making an incredible job during this New Year’s holiday. So special thanks to them.

Sergei Evdokimov 6:45

And yeah, let’s jump in. So it’s not a surprise for everyone that you know, that the COVID-19 pandemic and the lockdown caused changes in people’s behavior and preferences, leading to the unsaved bottom-line improvements in the digital economy, and in particular, strong demand leading to the strong demand of at-home activities, one of them being their gaming industry.

Anton Gorodetsky 7:14

Yeah, absolutely. So as you may see, in the report, we’ve tracked over $33.6 billion dollars deal value across 660 transactions with game developers and publishers being the key driver of investment activity. So you may see all of that on the present slide. That’s the dissection into major categories of gaming. In fact, over 50% of all deals of private investments meet both VC and corporate, and that reaches new heights this year with approximately $6 billion deal value and over 360 close deals. So just think about the number 360 deals almost a deal a day happened last year.

Joakim Achren 8:10

It is good. Okay, this stage of the industry… we are still in the pandemic. But the lockdowns started and people started adopting more gaming behaviors, which I think everybody’s been talking about. Thinking about the business of gaming. Which areas of gaming really benefited the most from this pandemic and the lockdowns?

Anton Gorodetsky 8:34

Speaking about the whole private investments, the market key focus was on multi-platform game developers, they took nearly 40% of the total raised value with Epic Games and Roblox at the top. In terms of the number of closed deals, mobile game companies were the most popular segment of investments. And that is kind of predictable. Since lots of people started playing mobile games. It’s 20% of all deals were mobile game companies, followed by eSports companies with 19%.

Joakim Achren 9:29

So think about this. The whole VC side of things, the early stage, that sector is growing. Can you talk about this, the most active players here? BITKRAFT, Galaxy Interactive, Andreessen (a16z), and Makers Fund? How did they do deals last year?

Anton Gorodetsky 9:54

I’m just going to start on this and Sergei will jump in. The top three VC funds last year were BITKRAFT, Makers Fund, Galaxy Interactive, and not surprisingly, Andreessen Horowitz. So together, all of them closed around 16% of all deals last year. And all top three funds primarily invested in, as I’ve mentioned earlier, game developers and publishers.

Sergei Evdokimov 10:25

What was interesting about these VC funds that actually, each one of them has deployed more than 50% of capital in game developers, developers, developers, and publishers. So nevertheless, they still have investments in the eSports activities and the ecosystem related, I would say around gaming projects.

What was actually also very interesting about 2020 that we have seen many games specialized VCs raising capital. The most notable were from Griffin Gaming Partners raising $235m. Then followed by BITKRAFT raising over $160m. And the rest like March Captial and some others.

I think that with the interest rates being at historical lows and growing exit multiples that we see nowadays, institutional investors have shown strong demand for the pandemic-proof game industry. But on the other hand, what we might observe as well, is that all of these funds, primarily headquartered in the United States are speaking about, again, the top three funds. And in fact, the US clearly dominated the global private investment market with over 75% of deal value, you know, being raised by the US-based startups, and actually, the top 10 largest rounds have been also closed by US startups. So quite a huge concentration of capital there.

Joakim Achren 12:07

Thinking about the m&a space and all the exits that were happening in 2020, what were your observations and findings there?

Sergei Evdokimov 12:24

M&A has been amazing this last year, and the game industry actually thrived in 2020. In terms of exit deal activity, M&A and IPOs, showing an impressive recovery from the previous year, and reaching $11.6 billion across about 220 closed transactions. That’s important.

We’ve seen multiple mega-deals being closed, including Peak Games $2 billion by Zynga and Liu Technologies by Tencent, which was $1.4 billion. And the most hyped about deal of 2020 was Zenimax being bought by Microsoft, that was $7.5 billion. Also Codemasters being bought finally by Electronic Arts, competing with Take-Two, and the price is $1.2 billion. So considering the recently announced acquisitions that M&A is valued would be $22.2 billion, making it well the record M&A year since 2016.

Sergei Evdokimov 13:50

If we get a bit deep into the detail and data, I think that what we might see is that most acquisitions were primarily closed by the public game companies. And we personally think that such strong deal activity, by other gaming companies was primarily driven by favorable underlying market conditions that we see nowadays, and a notable increase in valuation of publicly traded companies. So they get some cheap money on the markets and have increased the appetite significantly for the new acquisitions, and they’ll grow trying to scale at a faster pace than the typical organic growth.

Joakim Achren 14:32

Looking at the public market. Like what happened there is interesting because I believe that the changes are more short term, versus the early stages. You’re going to be betting for several years to see what happens with these companies in the early stage. But in the public market, it has been an impressive year for 2020. So, can you talk about those companies and the most active ones there?

Anton Gorodetsky 15:07

There are five most active strategic investors with great influence on the industry. Of course, the number one is Tencent, including its subsidiaries. It’s also embracer steal from the guys from Sweden, Zynga, and Microsoft. And while Zynga and Microsoft expand through mega-deals, as we have said earlier, Embracer and Stillfront, accelerated their inorganic growth through multiple midsize acquisitions with a medium deal size of $100 million to $200 million.

Joakim Achren 15:50

Pretty impressive. So let’s then talk about what’s happening in my neighboring country, in Sweden, because it’s really active. What happened, I have never seen anything like this happen. So gaming is definitely booming in the Stockholm First North Stock Exchange. Can you shed some light on that?

Sergei Evdokimov 16:11

Yeah, I would say that it came like a surprise for everyone. With this, you know, Sweden based companies having a lot of revenue, having announced a lot of acquisitions for 2020. So for example, if you combine all the Swedish game companies, they’ve been responsible for over 30% of the total number of announced M&A transactions in the gaming sector. That is a significant value driven by Sweden based companies. On the top list was Embracer, which several times announced multiple acquisitions on one day. Followed by Stillfront, which is more focused on the mobile platform, but also, with the recent acquisition of Sandbox Interactive, a PC game studio.

And then followed by a list of interesting companies that will probably stick to the same way of growing as Embrace, Stillfrront did, like Enad Global, MTG, Thunderful Group that has actually recently made an IPO raising 150 million plus.

I think that looking forward, in 2021, what we should expect is that we will see more acquisitions coming from these companies, since all of them are sitting on the cash so that that plenty of cash that they had raised. If I’m not mistaken, Embracer right now has over 3 billion, waiting for new acquisitions. So Lars will of course, expand his empire of gaming studios.

And what was interesting if we speak about each one of them is that Embracer, for example, starting this year, acquired several mobile gaming studios. So they have not only changed the focus from the PC Premium market, but change it to GAAS, acquiring such studios as Sabre interactive, making some DLC for Metro series acquiring for 4A Games, and right now entering in the mobile space. So that’s a very interesting strategy. And let’s see whether there there will be no more mobile deals coming from Embracer.

On the other hand, we expect the Stillfront to continue acquire mobile studio. This is not a this is not a public advice for anyone, but I don’t think personally that Stillfront we’ll change the focus and move into the PC and console segment. I think it’s pretty hard to do. So they will probably continue acquiring other mobile gaming studios.

And, again, analysing their strategies, the way they prefer to grow. I think that Embracer and Stillfront are still very different. If Embracer is like an M&A machine, acquiring everything in the market. Of course, like self selecting, yes, the targets, but still, it’s hard to imagine that the gaming company can acquire 25 studios and get this synergy immediately. I mean, like imagine they’ve made one really big acquisition like Sabre, then it was followed by several mid-size acquisitions, and then a lot of smaller acquisitions. So I think that we will see what’s going to happen with Embracer in 2021 and how they’re going to deal with people, numbers growing in the company and a lot of new problems.

Anton Gorodetsky 19:46

We’re also somehow expecting some companies from Finland to join the race. I especially liked your Tweets last year about Helsinki being the capital of gaming in Europe. And followed by Istanbul, I believe?

Joakim Achren 20:15

I think there are certain differences between the public market, and how you can leverage it with these countries. But yeah, it’s probably a topic for another webinar at some point.

Let’s get back to the Swedish public companies a bit later in this webinar. Let’s look at the overall public market at the moment.

Anton Gorodetsky 20:41

Yeah, sure. So, the public offering activity nearly grounded to halt in the first quarter of last year, it was only $300 million. But it showed a rebound—demonstrating a strong growth afterward. So in the second quarter of 2020, it was $4.6 billion. And it has eventually surpassed $15.1 billion by the end of the year.

Obviously, the major event here is the Unity IPO. They raised $1.3 billion, with a current market cap of close to $40 billion. So we shall see where this goes. But they really have shaken up the IPO market last year.

Sergei Evdokimov 21:37

So despite macroeconomic volatility, that is, right now the market, the renewed investor interest in the gaming space and the gaming political have stimulated IPOs and capital raising for many public companies in the second half of the yea.

So overall, around 10 game companies went public, and 8 more announced plans to go public. Among them such companies as Playtika, Roblox announced the plan to go IPO. So that’s an interesting thing that is happening right now in the market.

And despite this, we also observed that many of the gaming companies have raised money likes Stillfront and Embracer for acquisitions, using the capital, to make those. So I think that with interest rates being low, we have also observed many companies using the opportunity to re-finance their existing credit facilities. That was done by Activision Blizzard, by Zynga, given that interest rates are really at historical lows right now. That also has boosted the overall public offerings activity in the second quarter.

We’ve been talking about a lot about, you know, favorable market dynamics and the price is going up. We created a graph, where you can see how the prices of the major large-cap public gaming companies, that everybody knows, have increased during the last two years. For example, Activision Blizzard and Take-Two Interactive have shown an almost 90% increase in share price over the last three years. That’s incredible growth. Of course, comparing this with Tesla, it’s not so interesting, but if you’re speaking about Tesla-style growth, we can look at the Swedish gaming companies. Those companies have seen this Tesla-style extensive growth. So for example, Stillfront’s share price increased almost 8X, while Embracer showed 3X increase.

Joakim Achren 24:14

It’s a sort of “growth at all costs” mentality, which definitely has a lot of upsides. Do you want to give some predictions for next year at this stage before we go to the questions because I have a few things in mind? Do you want to talk about the market at the moment? And what it’s looking like for 2021?

Sergei Evdokimov 24:44

I would say that most of our predictions you will find out in our report. As we observed in 2020, the public game companies will be the key driver of M&A going forward. The trend will continue, with Tencent, the Nordic companies, the continued consolidation of the market, and many US gaming companies joining this m&a game.

I think that the Zynga will also join the game, they have just recently closed very large transactions and they took some time to integrate them, to kind of make synergy out of it. So they will probably join.

We also have recently seen the announcement of Take-Two and Electronic Arts competing for Codemasters. So they’re also probably joining this M&A game in the in the year. We should expect more m&a activity from public game companies.

The second predictio: large game companies, despite having huge activity in the M&A side, will also bring more investments in the video game industry forcing the competition with a traditional VC funds. As you can see right now, for example, Supercell joining the game of corporate investment, MY.GAMES itself is also very active at making corporate investments. I think that the competition will overall increase.

We see funds having attractive terms for the partnership, probably they can’t bring even if they try to, they can bring that much expertise and that much help to the studios looking to scale to another level, you know, at a very short period of time, but of course, at the cost of relation. So if you select independent growth with the VC, you will have a much higher valuation at the later stage, as opposed to when you select to work with the corporate.

Anton Gorodetsky 27:10

We agree, I believe that this has just started, I mean, what we saw in 2020, this is an early beginning, and there will be no correction in 2021. And even if the lockdown ends, which has been a major boost for this market craziness. Even if the lockdowns end, I believe it will not stop anytime soon, at least in 2021, because, first: The end of the lockdown is not gonna happen in a day, right? It’s gonna take months. And the second point is that there’s already a habit of playing, you have new audiences playing games. And they’re not going to drop this habit anytime soon.

I agree with Sergei that the race is going to get faster, and more companies will join it. And we’re in for something really great this year, judging by that Take-Two attempt to acquire Codemasters. They still have that money, they’re still going to buy something else.

Apart from that, we believe that game industry focused venture capital and private equity fundraising will continue to evolve, increasing the amount of those investments globally. And we also believe that we’ll see some more successful IPOs of the gaming companies. So the key candidates are Epic Games, Scopely, Applovin. The whole lockdown thing, it’s not going to end anytime soon, and institutional investors will continue to increase their allocations in game companies. So this roll up strategy, some more companies will definitely try to use them.

As a consequence of what we have said, we expect a higher level of value multiples in both public and private markets compared to the beginning of 2020. So that’s basically what we expect in 2021.

Joakim Achren 30:12

I’ll throw in some of my predictions for 2021.

I’m looking at the public companies and their buying spree, I think that’s like, how do they grow? That’s the big question.

Like, there’s now a lot of competition from Playtika going public. Huuuge Games doing the same. Scopely in rumors, we’ll be doing that. And all the existing public companies, including the very bullish Swedish companies there as well.

So I think we’re reaching a point where there’s more gaming studios… it’s doubling the amount of public companies out there who are thinking about M&A, which didn’t exist two years ago.

And a big question for everybody will be like, how did they grow as companies? Because that is what the market will be rewarding them for is the growth. So there’s two options.

I think, first, I want to cover the M&A side from my perspective. Besides these studios, like Playtika, Huuuge Games, Scopely, who are games companies, we have the Swedish holding companies who are already big in M&A, and they’ve built the “plumbing” to bring in and consolidate these studios fairly well. I think Stillfront is doing an awesome job, from what I’ve heard from everybody who’s close to Stillfront.

And then you have companies like Zynga and Playtika, who haven’t been as active or aggressive. Even though Zynga did place a big bet in 2020, I think it’s doing more conservative, bigger work regarding building the relationship, when preparing for the M&A. There was an interesting interview with on Deconstructor of Fun and where they were in interviewing Chris Petrovic, from who left Zynga recently, he was heading to M&A. And he talked a lot about like how they’re doing the approach, which I feel is a bit different.

There are some differentiations from the Swedish companies. But then what really happens for 2021? These are big question marks, where I don’t really know: are the best candidates already been picked? So is the M&A space sort of like empty? Or is the discussion still going on?

I believe there are a lot of options, a lot of companies still independent, which are great companies to go and acquire. And my belief there is that the M&A will start focusing more on younger studios, which could be pre-revenue, but what they have awesome games in soft launch, which is already one of the major hurdles in gaming is to just discover a game that retains players. So in a sense you already like past that point of m&a where you could think about, Hey, this is probably not going to help us on the EBITDA side, but it will like it will be better than then going and building these games on our own. Like, think about the merge gaming space now, which is really hot. And there’s a lot of players in that space. Also, the hybrid casual with Archero being the first game sort of like a big game there. But there’s more.

And of course, like games like Moon Active with Coin Master is a newcomer into this space. So besides the M&A for growth, then you have the option to start launching new games. For these companies, it will be interesting to see if they can actually do any growth outside of M&A during 2021? If you just look at the public companies at the moment… I personally cannot really name a hit game that was made by a public listed free-to-play company, which became a top 20 game or top 10 game. Zynga has pretty much brought all the companies into the frame which have built the hit-games already previously before they were acquired.

Sergei Evdokimov 34:46

There is Call of Duty Mobile, which is a great example of very huge companies collaboration and making something great together. I think on the Riot side which belongs to Tencent yesterday, there’s Valorant.

I think that on the one side, yes, it is harder to make something great organically within the business. But still, I think that those studios that have been just recently acquired will continue to make great games. And it’s just the question of the strategy. The strategy that you applied when you acquire those studios, either you make them enable creativity, staying free, and out of this bureaucracy of large public companies.

So you’re trying to keep the same culture of the gaming studio that you acquired, so that they can continue to be… to continue to have inspiration and something within themselves, to show the market, and just helping them with the financial side, and with some user acquisition experience expertise, or you’re joining them to your huge corporation, you’re doing what you want, and at the budgets that you want. We’ve talked a lot about the strategy of the Embracer and Stillfront. And I think that they’re right now on the right track, as well as many other companies. The track of joining the studios, saving the original creativity there is and just helping them with this financial side and user acquisition.

Joakim Achren 36:33

Yes, in a sense, it’s an interesting bet. If you acquire 20 companies, do you place 20 bets? Finding the next hit game, as an exercise? So we’ll see what happens. Then, my predictions for the M&A strategy regarding like going a bit earlier, in what you’re acquiring, I think it’s a clear stage, that could be the Series A, where there are developers currently raising after they’ve established all the metrics that the game could be scaled, they raise the Series A. There is already happening, M&A in this side, like Supercell, taking this major stake in Metacore, the merge game, Merge Mansion developer last year. Supercell isn’t a public company, but there’s a model there, where if you can move early, as a public company, and secure titles that are coming out in 2021, or 2022 after they’ve been in soft launch for a year might be an interesting strategy that I’m at least looking forward to seeing more.

The challenge there is that there wouldn’t be an immediate effect on the EBITDA or any of these companies. I think the challenge there is to educate the market on these pre-revenue opportunities as being a smart acquisition move.

Sergei Evdokimov 38:22

I think that is two different strategies.

Strategy number one, you acquire a profitable sustainable gaming studio and helping them to scale to the next level, where they already know, you already understand the user acquisition, they already understand a lot of things that how does it work, and how to scale the game, and probably needs some… maybe like big brother to compete with the big guys within the genre. That’s number one strategy. Yes, this is like an acquisition, like Storm8, for example, was very successful. So probably there is a very small help from Stillfronton on their side because Storm8 was already a very successful business.

And a completely different strategy is when you’re trying to… from this very risky stage at the soft launch, or just the start of the global release, helping the guys to scale. Because despite that, you have to share your user acquisition expertise, you also have to teach them, you also have to show them how to do it, you also have to overcome all the problems together with them. And this requires a lot of attention, a lot of people, a lot of work and a lot of resources from these huge strategics. And not all of them are ready to provide this help. I mean the approach that you were speaking about is more like about the approach of MY.GAMES. So we’re trying to do is we’re trying to help the studios at this stage, to overcoming these problem. That’s a typical difficult way. But still we we have a track of success doing those.

So, are there any good studios left for M&A? Well, first of all, what do we have discovered in 2020 is that the listing of public gaming companies: even if you’re public, it doesn’t mean that you can be acquired. We’ve seen this with Liau technologies. We’ve seen this with the Codemasters right now, with Electronic Arts and bidding for this. So, public gaming companies are still there. And large gaming businesses like Tencent, like, the “big four”, can still can continue to consolidate these companies and acquire those studios if they find them too reasonable for them.

Second, what we will observe is, I absolutely agree with you that the average check size will probably… the average revenue of the target will probably decrease because a lot of already well-established gaming businesses have been acquired. There are great studios left on the market, that still can be acquired. But I think that some of them will also think about the IPO way. Thinking about staying independent and evolving the business further without joining someone else.

Absolutely agree that probably we will see more M&A moving from these large sustainable businesses more towards some small businesses that are in the scaling phase. Yep, absolutely agree with you.

Joakim Achren 41:52

A quick comment on that. I think that if you go early, the problem there is that if you go the VC route at that scaling phase versus get acquired, you’re keeping your independence. And maybe in few years, your company could be a unicorn versus if you sell too early. So I think this is the big question that then the founders and the early-stage VCs will contemplate on. What is actually happening when the game starts scaling? So yeah, it’s not a sure bet for sure. Going that route is difficult.

Joakim Achren 42:41

Let’s jump into the questions. The first question: In case it hasn’t been covered by the end, when and how will this M&A craze end? And who will be the losers? Talking on the dev side of it, maybe? What are your thoughts guys?

Anton Gorodetsky 43:06

Well, again, as we have mentioned in the prediction section, we do not think that this craze will end at least this year. The stakes are super high. And I personally do not believe that the public companies will pull a stop on this thing this year.

And again, the habits are there and the lockdown is here. All of these patterns that has been have been developed last year, they’re all still here. So the craze will not stop. And as for the losers? There might be none. I believe. Gaming will have its correction, obviously. And it’s only a question of time, but as for the losers? I’m not sure that will be any? Maybe Sergei has another opinion.

Sergei Evdokimov 44:23

Speaking of all this M&A activity… We’ve seen a lot of activity in terms of the number of deals, but the valuation of mergers and acquisitions in the previous years has been also very significant. It’s just that right now we’ve seen a lot of people talking about it. That’s why you can have this feeling that the market is kind of exploding. So we should always bear in mind that the gaming market is still not a mature market. So it’s still an evolving and growing market, and the consolidation is still yet to happen. So even though we see huge players as Tencent, having a lot of stakes everywhere. It’s still a very decentralized market. So it’s not like one company has over 30% of the market, but we are moving towards it.

I think this is okay, in general for the market, for the industry, to move towards such way, and then you will see new startups, competing with these old guys, etc. This is how the market behaves, actually.

Speaking about the losers, I think that’s important to understand that not each M&A deal could become a successful deal in terms of the returns that you make on it. So even though the probability of success is much higher,, because you’re strategic, you understand what you’re doing. You have expertise and you have the right people to assess the opportunity and to make the acquisition.

Second, because you’re not only betting, but you also participating in making this deal success. So it’s not like you’re just effortlessly acquiring the target, and just sitting and waiting. Now, you’re also participating, you’re helping it. So it’s also your force included in it to become successful. But still, not all M&A deals are successful. So losers, I think that’s maybe not not the best word to describe here. But some of the M&A will not be that successful.

Joakim Achren 46:47

Question: Is the game industry mimicking the general economy of the liquidity of the markets, where there’s so much capital available in the world, where everything’s been driven up? Like the whole global craze that has been going on in the stock markets could have some consequences?

Sergei Evdokimov 47:30

I would say that’s a difficult question. It’s a question for the investment banker guys, who are following the market, who are reading public stock reports, etc. What I can say, from my perspective, is that market is extremely hot, and in the general market nowadays. And the stock prices are really very, very large. They have shown significant increase, despite the macroeconomic situation that we have worldwide. So probably, there will be some changes.

And even if you go to the Wall Street Journal, or Bloomberg and read the news, there are a lot of analysts writing about this, about the reasons why the market is really hot right now. And of course, the gaming market is not the largest market. If we’re speaking about the overall situation of the S&P 500. Gaming is very small compared to all the big guys like Facebook, Apple, etc. The gaming market will follow the general trend, but it has its own way.

Joakim Achren 48:50

I can answer this question first? What do you think about the growth of the merge games genre for 2021?

My personal feeling is because there are big studios getting into that genre as well, I think the CPI, the cost per install, will start increasing. it’s sort of like playing the same role as us back in the day with Match3 when you had King and then all the other puzzle games started appearing, but merge is like a bigger new genre that didn’t exist previously. And seems like it’s being loved by the puzzle audience. So I feel that the problem is that the CPIs will start scaling up so there’s not that much time to get on the merge bandwagon. Any thoughts guys?

Sergei Evdokimov 49:52

That’s kind of somehow new gameplay that came to the market, that will happen in 2021 that there will be a new trend again. So it happens each year. So what can you say? What do we think? We think that this is great. This is great that since the launching of the App Store, and Google Play, and the mobile gaming market has always something new to introduce to the people. That’s great.

And there were some deals, not only with Supercell, but also Big Fish Games, acquiring EverMerge.

Anton Gorodetsky 50:43

From the global perspective, the more the merrier. Obviously, the more audiences there are in mobile gaming. And it’s the better for all of us. And taking into account the fact that people are still mostly sitting at their homes, and the at-home entertainment industry is getting boosted is still getting boosted.

I agree with Joakim here that it is, it will soon be probably too late to get onto this train. And if the question is about whether and how soon will it end, then I guess not in 2021 at least.

Joakim Achren 51:38

Question: The concern with the Swedish market, with these investments, valuations so high, is there a risk of… sort of overcooking? How do you feel? Anything to add to what we already said?

Sergei Evdokimov 52:03

I would say the general risk is to understand whether all these acquisitions would really add value on a sustainable basis, meaning not only in 2021 or 2022. So adding EBITDA, as a result of the acquisition. But what is going to happen with all of these studios, in the years going forward? What shall we do in order to understand if they are growing too fast or not, is to look at the studios that have been acquired. Look at the metrics, look at the revenue, financials, what is happening with them. And then you can find all this information, the annual reports of all these Sweden based companies. So in order to understand whether it’s growing too fast or not fast, we should look at the data and then compare what were the initial targets? And what is really happening with those? So far, so good.

Joakim Achren 53:02

There’s another question here regarding the bigger acquisitions that happened with Codemasters deal Zenimax, bigger deals, versus the smaller deals of Embracer? Do you think any of these groups may be overstretching or ultimately heading for a fall?

Anton Gorodetsky 53:29

It does seem to me that, there’s the vibe of everyone expecting things to go down suddenly, like judging by the questions. Like everybody’s like waiting for the companies to fall, or to fail.

Joakim Achren 53:46

Personally, I feel that there is definitely like, the risk regarding… Game launches are always the trickiest bit like we saw with CDProjekt and Cyberpunk 2077. That’s a big reminder of what already happened in 2021. Like, sort of like the ramifications are now being seen.

Anton Gorodetsky 54:10

There’s this point that when we’re speaking about such mega-deals like Microsoft, and Codemasters, and Electronic Arts. It may be easy to get over-excited when there’s such big money and everyone’s talking about games and the gaming market. It is very much easy to forget that it’s actually a complicated process. I mean, the game development and making games and either mobile or console or PC games, and the example that you’ve just brought with CD Projekt RED proves that with even with lots of experience with years of production, and with millions of dollars in the budget, it may still be very much possible to fail.

Personally, I will not make any bets of who will actually fail in the years to come made 2021, or 2022, or maybe four or five years later, but obviously, the chance is always there. Again, even talking about the Zenimax deal. So we all remember what happened with Fallout 76. Yeah, the chance is always there. But I mean, talking about the big fall for anyone, in particular, I would not place any bet right now.

Joakim Achren 55:52

Question about the IDFA. I think we didn’t touch base on that yet. My personal feeling is that this is one of those changes that all the boats that are floating at the moment at the surface, which are the games companies, the tide will go down, and everybody will follow the tide, and then it will come back when everybody knows what they should be doing. So basically, CPIs will be balanced, according to what people are figuring out. I think people will share that information. And there won’t be like somebody holding the secret sauce for years and the rest will be struggling.

Sergei Evdokimov 56:40

I would say on the M&A side, maybe right now, some buyers are trying to hedge their positions and risks around making acquisitions of the other studios, which will be most probably affected the most by the IDFA. So we should probably see this happening in the market. But I think that eventually this year, maybe it will slightly stop the M&A activity if some concerns would arise, and everybody will understand that they need to take some time to understand how to tackle this problem with the IDFA.

But I would say each year, there are problems that arise from nowhere, you know, and this is like a typical problem that each gaming company should solve. It’s not like for, for someone, it’s for everyone. So I think that gaming companies will deal with this. And in general, again, it will not influence maybe the market that much is just going to be the new rules. And we’ll just follow them.

Joakim Achren 57:54

Yeah, I feel the same way. Moving on here.

You covered the the private investing side, the VC landscape, but there’s not much interest happening in the Series C, D, ettc.? Well, they’re Scopely doing big stuff. And do you think like these studios that are remaining independent until that point.. Is there still some kind of advantage of a platform to be built there where they could leverage other forms of capital, besides going into the public market? What do you think?

Sergei Evdokimov 58:49

Well, at least what we observed in 2020, all these huge rounds were raised by companies that are already very profitable, and don’t have any issues with financing their operations. And I think that if you’re speaking about the game developers, speaking about Series C round, they’re most definitely 99% profitable because the gaming business, in general, is profitable. It’s not like Uber.

The unit economics there are quite clear that it should result in profitability moving forward. Now, there can be a scaling phase in the beginning, but it’s not Series C round. I think it’s Series A when you might need some certain amount of money going a bit negative EBITDA, scaling the game and then have profitability.

So returning back to the question with a Series C round, the only thing that you will need to raise money is to make acquisitions. So probably growing much faster than you can do on your own basis. That, at least what we have seen with I think Applovin, with Scopely, haven seem that much with Roblox yet. But Roblox is going public so… And Epic Games was very active in terms of acquisitions this year, so probably they’re raising money for the acquisitions.

Will there be any other independent studies going forward? I think yes, they will be. There are always some studios that prefer to stay independent, prefer to do it on their own way.

Joakim Achren 1:00:34

One final question for both of you: What will be the next big M&A target this year?

Joakim Achren 1:01:12

I think it’s… Moon Active will be bought, I think that will happen by somebody, they won’t buy other companies they will be bought.

Sergei Evdokimov 1:01:26

Well, I know for sure that they’ll be a lot of successful IPOs. So this will probably maybe one, some, several of them will be like huge IPOs. But I’m not sure about this because they don’t have any intention to raise money. So probably we’ll choose direct listing, given that recently US market has approved direct listing as a procedure to going public without raising too much money.

They’ll become more popular among gaming companies in particular, that’s for sure. Speaking about large acquisitions, maybe Playrix who would come up with something. And if Playrix is gonna, do something with all that they have… It’s going to be huge. It’s gonna be very huge. Let’s see.

Anton Gorodetsky 1:02:27

I’m not sure about the one particular target. But I’m thinking about a multiplatform target. There are a lot of candidates, man, I’m just not sure about the one single. I mean, talking about Codemasters. Right, that is not one obvious target. For the acquisition, at least for me. But it could be $2bn. I’ll just have to think about that.

Sergei Evdokimov 1:04:16

And maybe just to finish with a general disclaimer: all of these are our own opinions and not opinions of MY.GAMES, or any company that we are working with. So please bear that in mind. That’s just a personal friendly talk with Joakim.

Joakim Achren 1:04:34

Yeah, nothing too serious.

Anton Gorodetsky 1:04:36

We just I just guys who love games a lot.

Joakim Achren 1:04:55

Cool. All right. We’ll be sharing your report. Thanks, guys. Thanks, everybody for joining Take care. Enjoy today.

Anton Gorodetsky 1:05:03

Bye Bye, guys. Bye. Stay safe.