Social gaming M&A: ‘Earn-out deals can be a double-edged sword’
In the latest of our interview series featuring speakers from the Casual Connect Kyiv conference, Oakvale Capital director Daniel Burns and Tangelo Games boss Vicenc Marti reveal why social gaming is such an attractive market for acquisition and what to expect from the road to consolidation.
iGaming Business: When is acquisition the right way to secure growth, and why? As a dealmaker, what are you looking for in both parties?
Daniel Burns: Typically, we act on the sale side. Companies come to us when they are starting to grow, they are looking at their ARPDAU [average revenue per daily active user] and how they can increase it. They usually need to secure additional capital, typically for marketing purposes, but it could also be to add a vertical or geography to their portfolio. Big is beautiful on the social gaming side at the moment, although there is still the opportunity to be successful on a game-for-game basis.
Vicenc Marti: There are some specific motivations for entrepreneurs. Sometimes you have to sell because, either at board level or shareholder level, you are pushed to make that decision. In these situations, it’s sell or implode. Then you have to be in the fortunate enough position that you actually want to sell and the market thinks you’re a buyable product. Now, I’m in the shoes of the buyer, what we’re looking for is companies that complement our portfolio, but that we would find hard to build ourselves. They’re usually going to be new verticals or territories.
iGB: What should studios expect to change as a result of acquisition, and over what period of time?
VM: The acquired company is going to have to find a completely new framework for incentivising people and, most of the time; you will also have another layer of management, control and bureaucracy to deal with.
DB: Acquisition is hard. It’s a bit like a marriage, you have to choose your partner carefully. If you are selling a reasonably good business, then the likelihood is that you will have a choice of more than one potential partner. You have to ensure there’s a good cultural fit and, if you’re going to have an earn-out component, it’s not just additional bureaucracy. Most sellers have been an entrepreneur and their businesses have made reasonable money, now they’re going to have to join a bigger company and they need to know they’ll be happy there. Change takes time. It will usually be business as usual for six months to a year, but you’ll have the sense that you’re part of something bigger. Generally, the acquiring party will not want to make massive changes. If you have bought a successful business, you want it to keep doing what it’s been doing and maintain its autonomy.
iBG: What are the pitfalls of navigating the transition of an acquisition – are there any cautionary tales that you can share?
DB: I can tell you about a missed opportunity. I pitched to a very successful social casino, which no longer exists. We created a deck for them, with full valuation metrics and we came up with a figure, but they wanted to double that.
It was understandable, sometimes people don’t see eye to eye on value. But a year later they came back to us and said they’d consider half the original figure. By this time, that was about a $50m difference from the day we first spoke to them. The cautionary tale would be, the market decides valuations.. You have to be motivated on a continual basis to pursue new ways of working and improve what you’re doing. It’s not an oil gush that’s going to keep on paying.
VM: Earn out arrangements can be a pitfall. If it is not well structured, it can be a double-edged sword. If an acquired business is going to be measured on the performance in the second year after the acquisition, there’s a risk they will manipulate numbers to hit that target. They are likely to spend a lot of money on marketing in the first 10 months, and then stop investing after that point to maximise their EBITDA before earn out. The company will pay out the earn-out but the next month the revenue will drop because of the lack of investment.
DB: You have to make sure you are motivating the right people in an earn-out. There’s no point only incentivising the shareholders if they are separate from the management and not driving growth.
iGB: How has the appetite for acquisition in social casino changed since major deals like Caesars and Playtika?
DB: It’s still strong. There’s still an appetite for good businesses. The difference is, if you’re starting out today, it’s probably a bit tougher to become a good business than it was five or six years ago.
The Caesars/ Playtika deal, didn’t change the pursuit of acquisitions but it showed that big deals can be done. I would say that most of the top 15% are still looking for acquisitions.
VM: You need to be bringing something new to the table. It’s important to add a twist or a spin, or a vertical, platform or geography. You can plot the growth of the industry on the introduction of new platforms. The industry came to life with the introduction of Facebook canvas, and we saw huge growth when mobile started. When another new platform comes in, we’ll see another wave of innovation.
iGB: How is consolidation reshaping the social casino market and what knock-on effects can we expect to see?
DB: The market started with a few players hitting from different angles, you had the likes of Zynga, with village building, social casino and poker. They were all things to all people. Then you had the very dedicated social casino providers, but the two sides didn’t really talk. What we’ve had over the last few years is that whichever end of the spectrum you are on, all providers regard themselves as entertainment businesses. This is not gambling, its innovative products to engage your customers. We will see more people trying to acquire mobile games style businesses. These will be large entertainment businesses, where playing social casino or solitaire will be just one of the ways that their customers engage with them.
VM: One challenge is for the industry to expand its boundaries. We’ve built the industry on a narrow definition. Mahjong now being played on WeChat shows that we are all entertainment companies trying to take a percentage of people’s time. Land based casino companies have been forced acquire social casino in order to compete. This is a growing trend and until the last of the major land based casino companies has acquired social casino, I don’t think it will stop.
Daniel Burns and Vicenc Marti are on the Before & After Acquisition panel at Casual Connect in Kyiv on 25 October 2017.
A former lawyer, Daniel is one of the leading deal-makers in the gambling and social games industry. Vicenc is president of Tangelo Games.
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