Following Microsoft Corporation's (NASDAQ:MSFT) deal to acquire Activision Blizzard and Take-Two Interactive Software’s (NASDAQ:TTWO) acquisition of Zynga, analysts said there remain other video games companies on the market that are ripe for consolidation.
The Microsoft deal "highlights the drive for both horizontal and vertical consolidation within the video-games space", analysts at Credit Suisse said in a note published on Wednesday.
Following on from an active two years for games industry mergers and acquisitions, analysts at Shore Capital said "it appears that the video games industry deal momentum has continued throughout January", with the UK small and mid-cap scene witnessing Team17 acquiring Astragon Entertainment and indie mobile publishing specialist, The Label.
"A common theme with these transactions, in our minds, is the demand for valuable IP, which can be leveraged across various platforms and entertainment industries, including a particular interest in mobile," said ShoreCap analyst Katie Cousins.
Credit Suisse also said intellectual property and development capability would be the attractive qualities for potential bidders with the companies it covers (Ubisoft and CD Projekt), with company's growth plans meaning "any hypothetical bid would have to be at a substantial premium to gain their support".
Looking forward, Cousins said she would expect to see further market consolidation with a focus on collecting IP.
"We believe the UK video gaming companies possess similar qualities to those recently acquired and that themselves may look attractive to some of the larger players," she said. "Similarly, we would not be surprised to see other leading companies within the entertainment and media space attempting to buy a video games developer or publishers, given the advanced technology and adaptable/popular franchises which can engage with a large demographic."
Looking at the Activision acquisition, analysts at UBS said their initial take was "modestly cautious" as Microsoft would be "buying a challenged asset (a turnaround story) and making its largest-ever acquisition to bolster a segment that most Microsoft investors considered secondary" to what has been the core growth narrative in recent year of its Azure/Office 365 cloud business.
"We spent the day on the phone with gaming industry experts to sharpen our view and came away more constructive," said the UBS note, with the strategic fit seen as "very strong" and the valuation of six times revenues and 15 times EBITDA on 2023 estimates seen as "reasonable".
The deal is "primarily a content aggregation move, not some metaverse play", with Microsoft expected to turn around Activision Blizzard’s execution issues and stem attrition.