Continuing our Extreme M&A series, this month I want to examine another of the most conspicuous games company transactions within our M&A database, that of IGN Entertainment by News Corp. This particular acquisition appears to have been driven by a single motive, buying a ready-made online community. Although the acquisition was of a community rather than a developer, it makes the valuations of most other games company transactions look like fire-sales.
In October 2005, a newly established Fox Interactive Media Inc (a division of News Corp.) acquired IGN Entertainment for an astonishing $650m in cash. IGN comprised some 20 major and 1,500 affiliate web sites (most games-focused), the web and middleware company GameSpy, premium and free download services Direct2Drive and FilePlanet, and review aggregation site Rotten Tomatoes. In total, IGN and its network attracted 28m unique users per month, a community dominated by males aged 18-35. It represented not only one of the largest English-speaking online communities of young men but also one of the most influential for purchasing decisions and establishing trend.
IGN was originally the web arm of Imagine Publishing (the US division of Future PLC) but was spun off in 1999 raising $68.5m in private equity followed by a further $70m when it IPOed on NASDAQ in 2000. Unfortunately IGN during this period underwent a protracted identity crisis changing its name four times and disastrously trying to diversify outside of its core games content. Less than a year later, IGN’s share price had plummeted 97% and the company was forced to refocus on games again. In 2003, with the internet bubble showing no signs of being re-inflated, IGN was taken private (its shares were acquired and the company de-listed from NASDAQ) by private equity firm Great Hill Partners for $29.8m.
It was a highly astute but extremely risky move by GHP; IGN was loss-making and was set to record turnover of less than $18m in 2003 but still had its colossal community, a community that GHP firmly believed was fundamentally under-exploited and undervalued. Along with two private equity partners, GHP invested heavily in IGN, growing its sales to $43m in 2004 but seeing its losses widen to $19m. With the markets regaining their buoyancy, IGN filed to re-list on NASDAQ in 2005 and raise a bold $200m (including $120m earmarked to pay off the debt used by GHP and its partners).
Despite significant preparatory costs, the second IPO never happened, in part because GHP had craftily initiated disposal discussions with News Corp in parallel. Whether IGN would have ever achieved its listing is unclear and it is possible that the NASDAQ listing could simply have been a clever attempt to force News Corp’s hand. Intentional or not, the strategy worked and worked brilliantly. News Corp not only made its move before IGN could list but also paid a $650m consideration comprising $620m in up-front cash payments and only $30m in conditional payment (most games transactions comprise at least 15% conditional payment with a higher proportion for the riskier acquisitions). Furthermore, based on its anticipated 2005 revenues, IGN was acquired for a multiple of nearly 10x forecast sales; somewhat ironic considering that News Corp had publicly lamented how overvalued games publishers were just a year earlier.
This transaction was a triumph for GHP in particular who, in less than 2 years, managed to generate a $500m profit on $150m of debt and equity investment. It also seemingly represented a return to the nebulous valuation methodologies of late 90s which were often based more on the size of community than the fundamental economic returns it was generating.
The acquisition of NeoPets ($160m) earlier in 2005 and the subsequent acquisitions of Xfire ($102m), Atom Entertainment ($200m) and Club Penguin creator New Horizons Interactive ($700m) suggest that the willingness of non-games media companies in particular to pay a significant premium for established games communities has not diminished and represents an increasingly stark contrast to prices paid for more traditional games companies.
Interestingly, despite the booming demand for virtual worlds and social gaming, most new launches in these markets are coming from outside of the established games development industry. If you haven’t already considered how to make community creation and retention a core part of your games and company development strategy, it’s probably time now, given the considerable commercial, as well as potential exit valuation, incentives.