Mergers and acquisitions continued to dominate the headlines in 2019 with some high-profile deals involving major operator groups taking place. On the B2B side of the industry, there was increased activity too with NetEnt’s acquisition of Red Tiger a significant move which was somewhat unexpected.
Looking ahead to the new year, we asked five key industry stakeholders who have been involved with the M&A process in recent times for their view on whether we can expect more deals to be concluded in 2020 and beyond.
Recently there’s been an increase of M&A activity within the B2B sector. What’s driving this shift in trend?
Therese Hillman, CEO of NetEnt Group: The increase in M&A activity largely reflects the maturity of the market. The B2B sector has for the most part experienced steady growth in recent years, remaining an attractive proposition to outside investors. The strive for geographical expansion, increasing market shares and access to talent has also influenced the number of deals between existing providers. Being able to pool together resources and increase output can provide major strategic advantages in today’s competitive landscape.
Julian Buhagiar, co-founder of RB Capital: This trend has been gradually building up for some time. Thriving B2B businesses inherently have a better distributed risk profile and are less dependent on single brands and/or territories. Whilst good B2C brands will fetch higher relative valuations, with recent (and still ongoing) turbulence in the Nordic markets, B2B acquisitions are safer, and will appeal to buyers looking for a more stable return.
Huw Thomas, chief strategy and marketing officer at SG Digital: M&A is a natural part of the economy and a signal that some of the industry’s largest markets are beginning to rapidly grow and mature. The major market forces shaping our industry are clearly regulation, responsible gaming, player protection and cut-through player entertainment experiences. Most M&A transactions fit in to one of these buckets.
Market regulation shines a spotlight on M&A for market-access and market-share. Responsible gaming regulation requires investment and clearly, economies of scale are a significant advantage. And finally horizontal or vertical M&A integration is a key focus in that end-to-end player experience.
Our acquisition of Don Best, a leading managed trading supplier of real-time betting data and pricing for North American sporting events, is a good example of this. A powerful local hero in the newly regulated US sports betting space that is being transformed into a global content, pricing and risk management service with our OpenSports stack.
Matt Cole, managing director of Blueprint Gaming: It’s really down to the lead company’s requirements that drive the decision process, matching their ambitions to enable further business growth or diversify their product portfolio.
There are a number of different factors which can form the reasoning behind an acquisition, such as looking to bolster the lead-companies range of services, bringing further development in-house, giving them access to new territories and jurisdictions, as well as securing the talent and experience for certain market sectors.
Dominic Mansour, CEO of Bragg Gaming: Regulation, taxes and the resulting need for efficiency drove the initial thrust primarily with the B2C guys, but the same is true within the B2B sector who tend to be just as affected as the B2C through these changes in the sector. What does that mean in plain English?
Cost of doing business went up through taxes and the need to [ensure] regulatory compliance. How to mitigate this is through M&A which creates synergistic opportunities and naturally becomes the logical next step. Furthermore, we’re all searching for growth and whether or not it is there organically, acquisition remains a logical way to accelerate.
What are the main benefits for those looking to acquire a business? Improved product offering, new talent?
JB: Acquisitions are all highly strategic and depend on the buyer’s specific requirements at that particular transaction. The benefits can contain anything from human capital to IP, brand to territory, competitive mitigation to share price support.
DM: I’d separate it into three broad categories: 1, geographic expansion, whereby the need to enter new markets, diversify revenues or accelerate growth in a market currently untapped is critical, 2, complementary product offering; does your tech miss something which would be quicker and more efficient to buy than build, especially given the ongoing challenge of understanding the opportunity cost of technical development, and 3, competitive; this gives the double synergy benefit – cost savings where there is duplication and cross sell opportunities where there is not.
TH: An expanded and improved product offering is a significant advantage, together with access to a greater talent pool, but it also provides a hotbed for collaboration and innovation. For example NetEnt’s acquisition of RedTiger will unlock major opportunities in terms of growing our combined international footprint and distributional reach.
There are many complementary aspects between our portfolios, and with our combined capabilities, experience and ideas creating exceptional value to both operators and players, the deal will provide significant revenue synergies across our core markets and in emerging regions.
HT: No single M&A transaction has the same set of benefits. But succinctly, I would say that the benefit has to ultimately be a more engaging player experience that leads to value for customers and increasing share-holder value. It could be M&A for a new product that can be integrated into existing services.
It could be local market access by acquiring one of the leading suppliers of local content and technology. But ultimately, it has to add incremental value over the long term. It’s about being able to offer a benefit to your customers at a price, quality or speed that your competitors cannot.
MC: The benefits will differ depending on the decision to push through an acquisition. In Blueprint Gaming’s case, securing the most talented and experienced personnel in certain market sectors has been the key driver behind our recent M&A activity in the UK market.
Games Warehouse provided us with immediate growth in software and artwork capabilities, something that would have proved a lengthy process going through the traditional recruitment route. Likewise, the acquisitions of Project and Livewire gave instant expertise and resources for our land-based market game development division, bringing industry veterans and exciting new, pre-trained creative minds into the fold.
Overall, Blueprint’s strategy has revolved around the capacity and development of the company’s products, rather than stretching into new territories or becoming exclusive patrons through mergers.
Looking ahead to 2020, do you expect more M&A deals in the B2B space to take place? Will they be on the same scale as the NetEnt/Red Tiger deal?
DM: Good question, impossible to answer! We don’t see it ending in the near term, the industry growth hasn’t slowed, new markets are constantly opening up and technology continues to evolve rapidly. For the publicly listed, continuing growth trajectory remains critical.
MC: It’s very much a trend we expect will continue. From a game supplier’s viewpoint, the online market especially is becoming increasingly challenging for smaller companies and start-ups. Their aim will be very much focused on getting a foothold, gaining attention and then looking for the larger powerhouse mergers to enable them to develop under stable and secure conditions.
The independent game developers are a dying breed, with the massive start-up costs being one of the biggest hindrances to any ambitious developer, so merger is the only viable option for survival in such a saturated market. Online operators are always looking for the next big thing which will differentiate their offering.
One way of doing this is by blocking competitors from obtaining the same content as they have, which is why good exclusive content is a real marketing asset. So, merging with the best development houses and bringing their products in-house is a simple win for any operator.
JB: At present there are a lot of B2B acquisitions in the sub-£20m space. This is expected to increase over the next three years, as larger players seek to diversify their brand portfolio with a blend of own and white labels, whilst the medium to large (£20-100m, £100m+) deals are rarer as the middle segment is gradually becoming sparsely occupied due to acquisitions by the upper floor.
In the short term; expect more lower-value acquisitions punctuated by the occasional larger middle segment purchases. In the medium term due to absence in the £20-100m range, the larger players will start eating each other; as we have seen in the operator space.
HT: Regulation, responsible gaming and cut-through player experiences are here to stay, and M&A in 2020 will be shaped by this. The winners will be the ones who are able to deliver competitive advantage in all three areas. Whether we see deals on the same scale as NetEnt/Red Tiger will ultimately be determined by the value the acquirers place on plugging gaps in their proposition, reach or quality of execution.
The wonderful thing in our industry is that the opportunity to create powerful and responsible entertainment experiences gets greater and greater, week on week. It’s what keeps our strategy, product and marketing experts on their toes and long may that last.
TH: One hundred percent – there has been an explosion of suppliers in the online sector all vying for a position at the top of the market. With such increase in competition, a boom in transactions is almost inevitable. Considering additional factors such as regulatory shifts and evolving player trends, it is unlikely the pace of M&A activity will slow down anytime soon, as suppliers are looking to combine forces in order to tackle potential challenges on the horizon.