🎙️Embracer Group's Breakup: What It Means for the Future of M&A in Gaming

What are the implications to scale and M&A for the video games industry?

May 31, 2024

Look for a new weekly interview or discussion on current and relevant game industry development topics!

This week, the Pixel Bros (Matthew Kanterman, Brian Peganoff, and I) speak to Chris Petrovic, who led one of the games industry’s most successful run of M&A deals for Zynga over a nearly 5-year span, including Harpan, Gram, Small Giant, Rollic, and Peak Games.

As one of the industry’s leading experts in this area, Chris weighs in on the recent move by Embracer Group to split up into 3 separate companies and the broader industry implications.

In this discussion, the two most important concepts to note:

Embracer Break-up: The rise and fall of Embracer and what can other game studios learn from this experience?
Synergies and Scale: In a super globally competitive games industry, what are the specific advantages that a combination of games/game studios gives a company? What is the optimal level of scale to operate for maximum competitive advantage?

Check out the conversation below!

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Speakers:

Matthew Kanterman. Director of Business Development at Supersocial.
Joseph Kim. CEO at Lila Games.
Brian Peganoff. Founder at Timber Advisors.
Chris Petrovic. Chief Business Officer at FunPlus.

Embracer's recent decision to split into three separate entities—Asmodee, Coffee Stain, and Middle-earth Enterprises—marks a pivotal moment in the gaming industry's landscape.

Here, we explore key insights from a discussion with Chris Petrovic, the former SVP and Head of Corporate Strategy, M&A, and Business Development at Zynga.

We examine the implications for M&A in the gaming sector, the benefits (or lack thereof) of scale, and the lessons other companies can learn from Embracer's journey.

The Rise and Fall of Embracer Group

Embracer's M&A Strategy: A Lesson in Scale and Integration

Embracer Group's strategy of acquiring many studios and intellectual properties (IPs) initially seemed promising. The idea was to create a decentralized conglomerate where each entity operated independently.

However, this decentralized model proved ineffective, leading to the Embracer Group’s break-up into 3 separate entities.

Key Points:

Lack of Centralized Oversight: Embracer's decentralized approach lacked the necessary centralized oversight and support, which are crucial in creative industries.
Integration Challenges: The acquired companies did not benefit from the expected synergies, leading to inefficiencies and missed opportunities for collaboration and growth.

Understanding When M&A Makes Sense

Strategic M&A: More Than Just Acquisitions

Successful M&A in the gaming industry requires more than just acquiring companies; it demands a coherent strategy and effective integration. The discussion highlighted several critical aspects that determine the success of M&A:

Coherent Strategy: A clear, well-defined strategy is essential. For instance, Zynga's focus on "forever franchises" provided a strategic direction that guided its M&A activities.
Synergies and Integration: It is crucial to identify and realize synergies. These include shared resources, technology, marketing, and operational efficiencies. At Zynga, integration involved offering acquired studios a "menu of options" to opt into centralized services.
Scale and Focus: Finding the optimal scale is key. Though extensive, Embracer's acquisitions often lacked focus and coherence, leading to a dilution of value.

The Current and Future Outlook of M&A in Gaming

Market Dynamics and Strategic Adjustments

The gaming industry has seen fluctuating dynamics, especially with the impact of COVID-19, changes in consumer behavior, and technological advancements. The discussion provided insights into how these factors influence M&A strategies:

Post-COVID Adjustments: The pandemic temporarily boosted gaming engagement and revenues, but the subsequent decline has prompted companies to reassess their strategies.
Debt and Financial Engineering: Embracer's reliance on debt to finance its acquisitions added significant risk. Future M&A strategies will likely emphasize more sustainable financial practices.
Focus on Quality Over Quantity: The trend is shifting towards fewer, high-quality acquisitions that offer clear strategic value and synergies. This "fewer, better, best" approach ensures that acquisitions contribute meaningfully to the company's growth and competitive advantage.

Lessons Learned and Moving Forward

Key Takeaways for the Gaming Industry

Centralized Oversight: Creative industries like gaming benefit from centralized oversight and support to harness the full potential of acquired entities.
Strategic Integration: Successful M&A requires a thoughtful integration process that respects the autonomy of acquired studios while leveraging shared resources.
Sustainable Financial Practices: Avoiding excessive debt and ensuring acquisitions are accretive to earnings are crucial for long-term success.
Adaptability and Focus: Companies must remain adaptable and focus on strategic acquisitions that align with their core strengths and market dynamics.

Conclusion

Embracer Group's breakup serves as a cautionary tale for the gaming industry. While aggressive M&A strategies can drive growth, they must be underpinned by coherent strategies, effective integration, and sustainable financial practices. As the gaming industry continues to evolve, companies that balance strategic acquisitions with operational excellence will be best positioned to thrive.

Too many subtle but valuable lessons to write-up specifically here. Just watch the full discussion above!