In Q3 2023, gaming companies announced 33 M&A transactions worth roughly $5 billion according to Drake Star’s latest report. While announced deal value is up compared to recent quarters, the quarter had the lowest number of transactions since Q1 2021. Compared to the same quarter of last year, the number of announced deals fell 60%.
“The low number of M&A transactions reflects the uncertainty in the market and depressed public gaming company valuation,” Michael Metzger, Partner at Drake Star, told GamesBeat. He noted that smaller and mid-sized companies often see a lag between initiating and closing a deal, which could account for the dip in announced deals.
“On the positive, Q2 2023 and Q3 2023 saw a significant increase in deal value compared to Q4 2022 and Q1 2023,” Metzger said.
Private placements focus on early companies
Meanwhile, private placements are following a similar pattern, though the decline in the number of deals was more moderate. There were 182 private placements in Q3 2023 — down 20% from Q3 2022. Across these deals, disclosed funding totaled roughly $1 billion.
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Continuing recent trends, the vast majority of funding rounds — about 85% — were placed with early-stage startups. However, these startups brought just less than half of funding placements. These early companies are closing smaller deals on average, which accounts for this difference.
This has been the case across tech and not specific to gaming. “Well-funded VC funds are seeking for experienced founders and disruptive early-stage investment opportunities that might yield excellent returns in the long-term, while initially requiring much smaller check sizes,” Metzger said.
Moreover, there is downward pressure on later stage companies, where investors expect ROI through an IPO or an M&A exit. “The IPO market has been essentially closed for the last year and the number of exits has significantly declined. This along with the gap in valuation expectations among founders (who raised their last rounds at very attractive valuations in up market in 2021- early 2022) and what the currently more cautious financial investors are willing to pay has been reasons for the quieter mid to late-stage financings,” said Metzger. As interest in IPOs resume, Drake Star expects investors to be more interested in deals with mid to late-stage companies.
Investing trends and outlook
Despite the broader economic headwinds, declining valuations and efforts to cut headcount and costs, Drake Star has a positive outlook for gaming investors.
“Companies are under a lot of pressure to regain their valuation and show profitable growth. Internal growth often takes a long time and is often uncertain, and many gaming companies started to priorities external growth via acquisitions again,” said Metzger. “Based on our discussions with many of the top gaming companies, we expect the deal volume to increase again over the next year.”
Drake Star’s report noted that key strategic investors, particularly Tencent, became more active in Q3 2023. The Chinese conglomerate and its subsidiaries completed five acquisitions after a long pause.
Additionally, growth stage companies will eventually need to raise fresh capital at some point next year. As a result, Drake Star expects private placements and M&A activity to increase in Q4 and 2024. Metzger expects companies will be more open to raising funds at valuation levels based on current market expectations in the coming quarters.
Drake Star’s full Global Gaming Report for Q3 2023 is available here.