Digi-Capital: Investment demand still exceeds supply

The 2011 Global Video Games Investment Review from investment bank Digi-Capital has claimed that many high performance mobile and social games companies are still struggling to attract quality investment, despite a flurry of high-profile deals involving market leaders.

The current advice to independents? Find investment or sell up and get out.

The report, which assesses market trends and investment activity in the games industry worldwide, believes that smaller independents displaying 100 per cent year on year revenue growth and operating margins of 20-50 per cent aren't able to currently attract quality investors, causing stuttering development in the area.

High-profile companies have made a number of significant funding deals recently, alongside a number of acquisitions by major publishers. Zynga, for example, was reported to have raised $500 million in a recent round of funding which valued the company at anything up to $10 billion.

In the last year or two, EA has acquired Playfish for $300 million, Disney bought Playdom for a $763 million sum and Chinese company Tencent acquired Riot Games for $400 million.

However, these large-scale deals seem not to have translated into funding success for smaller companies,and Digi-Capital suggests that these independents should be either securing growth investment or preparing to sell to take advantage of currently inflated merger and acquisition prices.

"Video games investment and M&A [mergers and acquisitions] are accelerating, with fundraising 52 per cent higher in 2010 than 2009, and M&A 60 per cent higher in 2010 than 2009," says Digi-Capital MD Tim Merel. "Online/mobile games valuations for both investment and M&A have been rising, with major deals attracting significant interest.

"Major corporate acquirers are increasingly looking to external investments, acquisitions, joint ventures and strategic partnerships for online/mobile games growth and diversification, and as discussed the strong Asian players (from China, Japan and South Korea) are actively seeking foreign opportunities to leverage their capabilities internationally, as well as to source international IP and knowledge for large domestic markets.

"But the opportunity will not last forever, as public companies are subject to intense analyst scrutiny of high valuation investments and acquisitions. Not all current online/mobile games investments and M&A are likely to deliver as expected during 2011, with a potentially negative impact on valuations.

"So the time to act is now, either raising funds to accelerate growth prior to consolidation, building joint ventures and strategic partnerships to enter major foreign markets (particularly from and to China, Japan and South Korea), or exiting to take advantage of the strong M&A market and valuations."