Which company gets bought next?
17th December 2020 |
As a child of the 80s and 90s I grew up on the greatest technology revolution that has ever hit the world…
The rise of the home gaming console.
The Nintendo Entertainment System, Super Nintendo, Sega Mega Drive, Nintendo64, Dreamcast, Panasonic 3D0, PlayStation, Xbox, Gamecube, PS2, PS3, PS4…
Okay, the last few have come in adult life. But once you’re a “gamer”, you’re always a gamer. I’d dare say that everyone deep down is a gamer. We all love to play games. It’s not necessarily always “video games”, maybe it’s board games, strategy games… even mundane mobile games.
We’re a species that love to play a game.
However, there’s no doubt the wealth and money that flows around the video game world is mega business.
I’ve written about this several times before, including in Exponential Investor earlier this September saying,
… when you look at the money, you can’t deny the size of the players in this space.
Today gaming companies have become enormous, giants of industry. Activision Blizzard (NASDAQ:ATVI) ($64 billion) and Electronic Arts (NASDAQ:EA) ($41 billion) are just two titans of gaming.
King Digital Entertainment was another, but Activision snaffled it up a few years ago for about $5.9 billion.
Zynga (NASDAQ:ZNGA) is another with a current market cap over $10 billion.
Another and arguably one of the most powerful game companies today is Epic Games. It’s the creator of the juggernaut game Fortnite. It’s estimated to be worth about $17.3 billion.
These giants are big for a good reason. The sheer weight of the market they operate in and the potential for even more growth.
It’s also a highly competitive market. What Epic Games showed was a relative newcomer can step into this world with a game or series of games that blows the world away and take a big chunk of the money from the big giants.
Hence, we’re now starting to see a lot of consolidation taking place in gaming. The giants of gaming are going on a shopping spree.
We saw just a few weeks later in September when Microsoft bought ZeniMax Media. Again, writing about it at the time I explained,
Microsoft, the manufacturer of the Xbox and owner of game developers such as 343 Industries, Turn10, Rare, Obsidian and The Coalition, made a huge announcement.
This announcement was the US$7.5 billion acquisition of ZeniMax Media. That’s a lot of cash (and yes, it’s US$7.5 billion in cash) for a company most people have never heard of.
But ZeniMax is the parent company of publisher Bethesda Softworks and game developers such as Bethesda, id Software and Arkane Studios.
Microsoft was buying a catalogue of hugely popular games, including the massive Fallout franchise. It sparked others into life. The thought that big console makers, creative studios and publishers were snaffling up huge gaming developers kicked the industry into overdrive.
This was amplified this week when a bidding war broke out for Codemasters (LSE:CDM). Take-Two Interactive apparently had agreed to a deal with Codemasters, then EA came in over the top with an even bigger bid for the company. It now appears EA will get it for the tidy sum of US$1.2 billion.
This is a market that is not just heating up, it’s on fire! (Note: a subtle reference there for any fans of NBA Jam.)
I see this a positive news for two of our gaming companies in particular, Frontier Developments (LSE:FDEV) and Gfinity (LSE:GFIN).
As I noted in our Gfinity recommendation,
Gfinity is in a world with big multinationals like EA, Activision Blizzard and Epic Games which are heavily invested in esports and could look to be more active in the areas that Gfinity operates in, rather than seek out partners like Gfinity.
That’s a catch-22 because there’s competition risk from these giants, but also potential that at the right time, Gfinity may prove to be an attractive takeover target from the likes of EA or Activision.
Also when it comes to Frontier, it’s actually got a foot in the door as well that positions it quite possibly in the sights of EA.
You see the takeover of Codemasters by EA is to be a leader in racing games. As noted by The Verge, EA CEO Andrew Wilson said,
“We believe there is a deeply compelling opportunity in bringing together Codemasters and Electronic Arts to create amazing and innovative new racing games for fans,”
“Our industry is growing, the racing category is growing, and together we will be positioned to lead in a new era of racing entertainment.”
One of Codemasters’ leading games is its franchise of Formula One licensed racing games. Another company that’s developing F1 games is… Frontier Developments.
In March this year, Frontier announced a multi-year game licence (from the 2022 to 2025 seasons inclusive) with Formula 1 to develop F1 management games. These aren’t the same kind of “sim” style racing games as Codemasters develops, but they’re still classified as racing games.
Frontier expected this to, “provide significant annual incremental benefit to Frontier’s financial performance from the release of the first game in FY22 onwards.”
It is just one part of Frontier’s biggest catalogue of games. But I see the Codemasters deal as being a further catalyst for more consolidation in this industry. I think that both Frontier and Gfinity make attractive takeover targets.
While there’s no certainty either will of course see a bid come in, I wouldn’t be surprised if one did. It’s an exciting time for the whole industry, with new next-gen consoles hitting the market, improvements in gaming hardware and software and of course the games themselves, it’s one area of opportunity I think all investors should have exposure to.
Christmas and New Year period update
As you may have seen from Monday’s edition of Sam Volkering’s Crypto Network, I’m going to be taking the next two weeks off.
Just a bit of R&R time with the family, at home, but not working, nonetheless.
That means there won’t be your regular weekly updates for the next two weeks. Albeit you might see something hit your inbox from me next week, or from our team at Southbank Investment Research over the next two weeks anyway.
Now while I’ll be away, I do want to reassure you, I always have one eye on the market. If anything urgent pops up that we need to communicate to you over the next two weeks we’ll still be able to get that out to you.
Having said that, with the public holidays, hence closed markets, it means there’s only really like seven days I’ll be off. So the likelihood of anything urgent popping us is slim.
Anyway, I hope you’ve had a good year, as weird as it has been – hopefully 2021 gives us all a lot more to look forward to. I for one am quite excited about what we might see in 2021, so I can’t wait to be back again in the new year with loads more for you here at Frontier Tech Investor.
Regards,
Sam Volkering
Editor, Frontier Tech Investor
