Microsoft’s $68.7 billion plan to buy Activision Blizzard and Take-Two’s $12.7 billion bid to buy Zynga pushed the first quarter toward a massive $98.7 billion in total value for game deals, according to a report by Drake Star Partners.

That compares to $85 billion for all of last year, which itself was a massive leap over 2020’s $32.7 billion in deals. But even if you didn’t count the biggest deals, there was also Sony’s $3.6 billion purchase of Bungie, said Michael Metzger, partner at investment bank Drake Star in an interview with GamesBeat.

“We hit almost $100 billion in deal value in the same quarter. Several years ago would have been totally unthinkable,” said Metzger. “That’s fantastic.”

The March edition of Drake Star’s Global Gaming Industry Report said the 387 Q1 deals compared to 1,159 in all of 2021 and 505 deals for all of 2020. Making sense of this kind of activity is one of the themes of our GamesBeat Summit 2022 event happening from April 26 to April 28 next week. (Tickets here).

Drake Star continues to forecast that deals for all of 2022 could exceed $150 billion. And the number of investments in game companies in 2022 is expected to hit a record, Metzger said. Gaming companies that have historically focused on the PC / console segment will continue expanding and diversifying into mobile, and vice versa. The acquisition of western studios by Asian companies will accelerate.

The activity shows the underlying health of the industry — boosted by continuous investment and acquisitions — as well as huge changes coming as industry consolidation happens across all gaming sectors of PC, console, mobile, and esports. In esports, Savvy Gaming Group bought ESL and FaceIt for $1.5 billion. That was significant as Saudi Arabia-based Savvy’s move represented the first major move by a regional powerhouse investor into games.

But there were some red flags as public offerings slowed down because of a choppy stock market spooked by the war in Ukraine. While valuations for most public gaming companies have corrected over the last six months, Drake Star expects private companies’ valuations to keep growing.

All of this activity shows the game industry is expansive and is capable of expanding and contracting at the same time. How companies fare in this market is dependent on their own execution.

“I think the fundamentals are still very strong. Some of the public companies probably were just overvalued during COVID. And that came down. For the private ecosystem, there are lots of new funds, lots of new money flowing into it,” Metzger said. “So that’s a sign that all the institutional investors and pension funds believe in the segment because a lot of funds are funded by them. So that’s a positive sign. I think valuations on the M&A side might come down a bit since public market valuations came down. The IPO market is essentially closed.”

The biggest deals

Metzger believes the Microsoft acquisition of Activision Blizzard, which still requires regulatory approval, will accelerate the growth of Microsoft’s gaming business across mobile, PC, console, cloud, and the metaverse. Microsoft will become the world’s third-largest gaming company by revenue post-acquisition.

Sony’s Bungie deal will give Sony access to Bungie’s world-class approach to live game services and technology expertise, furthering Sony’s vision to expand its player base.

And Take-Two Interactive’s Zynga deal brings complementary changes, including Take-Two’s best-in-class portfolio of console and PC games and Zynga’s leading mobile franchises.

In the first quarter, there were 82 M&A deals compared to 75 in the second quarter of 2021, 58 deals in the third quarter of 2021, and 68 in Q4 2021.

“I don’t see it, slowing down. And also, we can look at the mix of deals. But if you just look at the deal volume, and that also includes smaller deals at the seed stage, the number of deals at 287 was at an all-time high. So there is definitely no slowdown.”

Private game deals

Still, venture capitalists and strategic investors poured $3.4 billion into private game companies through 287 deals, a record-breaking quarter for the number of deals completed. By contrast, the National Venture Capital Association warned of a pivot point and a slowdown for investments in U.S. startups in the first quarter. On top of that, it looks like the valuations for the top private game companies are still lofty, Metzger said.

Large VC rounds were raised by Dream Games, Thatgamecompany, Tripledot, and Zupee while the most active VCs included Bitkraft, Sequoia, Makers Fund, and Griffin Gaming Partners. Griffin also announced that it had raised the largest game VC fund ever at $800 million in funds.

Blockchain games

One of the hottest trends was also the most controversial. Non-fungible tokens (NFTs) are being used to authenticate unique digital items and give players true ownership of things they buy in games. But hardcore fans and some game developers have opposed NFTs, much the same way that free-to-play games raised concerns of crappy games and scams a decade ago. There were 128 blockchain game deals that raised $1.2 billion in Q1. By comparison, there were only 43 mobile game deals worth $1 billion.

Still, a significant amount of new investment money is going into blockchain game studios. The largest rounds were raised by Animoca Brands, Immutable, and New Sin City, while the most active investors were Animoca Brands, Alameda Research / FTX, and Shima Capital.

“With blockchain, there’s very little M&A activity at this point. It’s still early. I think a good amount of companies are probably not going to make it. That would be my expectation. But there’s still a lot of money flowing into it. And we’ve seen in that in Q1, it’s where a lot of investments were made,” Metzger said. “I think there will be a second generation of companies that hopefully are going to be very successful, but it’s still very early and there is regulatory uncertainty around it.”

I have heard anecdotally that some game studio entrepreneurs have heard that game VCs will come running if the studios announce they’re making blockchain games. Some of that concern is validated in these numbers. On the other hand, it’s clear that tons of money is going into traditional games too. For instance, ProbablyMonsters announced that it had raised $250 million to finance multiple triple-A games just yesterday.

“A lot of startups have pivoted into where the money is available,” Metzger said.

Drake Star expects we will see many new NFT / blockchain unicorns among young gaming companies. Metzger also believes we will likely also see the first wave of NFT / blockchain acquisition deals this year.

For the blockchain industry, 2022 is expected to significantly exceed last year’s investments of $3.6 billion and will likely see many new NFT / blockchain unicorns among young gaming companies. Drake Star also believes we will likely also see the first wave of NFT / blockchain acquisition deals this year.

Big funds

More deals are on the way. We know that because limited partners keep pouring money into follow-up gaming funds, largely due to the success of many of the initial game funds.

Drake Star said there were a record number of new and follow-on funds focused on the gaming and crypto space, including FTX’s $2 billion fund, Griffin Gaming Partners’ $750M fund (closed at $800 million), Makers’ $500 million fund, Hiro Capital’s $340 million fund, Gumi Crypto’s $110 million fund, and many more, Metzger said.

There were other deals that were also worth noticing. Tencent, the world’s biggest game company, acquired China’s Black Shark for $470 million. This deal follows previous agreements that Tencent made with other smartphone makers, like ASUS and Nubia. Stillfront announced its completed acquisition of 6waves, a Hong Kong-based mobile publishing company, for an upfront purchase price of $201 million.

Wither public markets

In the public market, the stock market was choppy. Roblox saw its valuation fall from $42 billion during its 2021 public offering to $25 billion. Ubisoft is trading at a valuation of $4.3 billion, compared to January 2021 when it was worth $12.4 billion.

But there were still deals. Azerion, the owner of Habbo and Hotel Hideaway, completed a special purpose acquisition company (SPAC) deal worth $1.5 billion and $105 million in proceeds. Nexon raised a PIPE (private investment in a public equity) of $883 million from the Public Investment Fund of the Kingdom of Saudi Arabia. And Team17 Digital completed a $108 million PIPE for its Astragon Entertainment acquisition.

Drake Star expects that the initial public offering (IPO) and the SPAC market for gaming companies will pick up in the second half of 2022. Metzger still believes we could see IPOs for companies such as Discord and Epic Games.

Other notable deals

Animoca Brands raised $359 million at a $5.4 billion valuation in a round led by Liberty City Ventures with participation from Kingsway, Sequoia, 10T Holdings, and others.

Dream Games raised $255 million at a $2.8 billion valuation in a Series C led by Index Ventures and backed by Makers Fund, BlackRock, Kora Management, IVP, and Balderton Capital.

Immutable raised a $200 million Series C round at a $2.5 billion valuation, led by Temasek and backed by Animoca Brands, Tencent, and others.

Thatgamecompany raised $160 million in a round led by TPG and its $1.5 billion Tech Adjacencies fund. Tripledot Studios raised $116 million at a $1.4 billion valuation in a Series B led by The Twenty Minute VC. And Zupee raised $102 million at a $600 million valuation in a Series B led by WestCap Group, Nepean Capital, Smile Group, and Tomales
Bay Capital.

Prices

Metzger said average prices for deals were flat or slightly down. For revenue multiples, the average acquisition was priced at 3.5 times revenue across the 41 deals that reported numbers for total value. In all of 2021, acquisition price multiples were 3.9 times revenues.

Total value for 20 deals with reported numbers added up to 12.8 times EBITDA (a measure of profitability that stands for earnings before income taxes, depreciation, and amortization). For 2021, acquisition price multiples were at 11 times EBITDA.

That showed that even during an uncertain quarter for macroeconomics, the prices that game industry deals generated were still very healthy.

While valuations for most public gaming companies have corrected over the last six months, Drake Star expects private companies’ valuations to continue to grow through incremental financings.

“I’m aware of a good amount of additional funds that have not been announced yet,” Metzger said. “And I am aware of at least 10 gaming-focused funds that are just in fundraising mode. All those funds need to deploy their money. So I don’t see a slowdown coming in private investments as more money is flowing in.”