Everyone wants to acquire a gaming company these days it seems, including former Sony head Jack Tretton.
Best known for his involvement in the creation of the original PlayStation in the 90s, and his later run from 2006 to 2014 as president and CEO of what was then known as Sony Computer Entertainment America, Tretton has since been busy working with the independent development community through gaming funds like Interactive Gaming Ventures. Now he wants to continue that mission by acquiring an independent studio himself.
Speaking to IGN, Tretton says during his time at Sony and since, he’s seen a gradual shift has allowed small studios to be less reliant on large publishers to get their games into the world.
“Thanks to the online stores, anybody can be a publisher,” Tretton says. “So the good news is, the barrier to entry is dropped significantly. It’s still very costly to build a game, but a fraction of what it was back in the days when you had to do a AAA, a hundred million dollar project to see the light of day on the shelves.”
But that doesn’t mean that it’s easy to release such a game. He says that as indies look for more sources of funding, he’s seeing increasing interest in mergers and acquisitions [M&A]† But indies are reluctant, he says, because they don’t want to lose their independence, and going public themselves to earn money from investors is an expensive, complex proposition. How, then, can an indie raise money from investors while remaining independent, small, and secure?
Enter Tretton and his new company: PowerUp. PowerUp is a SPAC: a special purpose acquisition company. As Tretton explains concisely, SPACs are companies that exist for the sole purpose of acquiring or merging with an existing, private company and taking it public as a combined entity. It’s an easy route for smaller companies to become publicly traded while simultaneously getting extra financial backing, and potentially, an experienced group of industry professionals at their back who can offer advice, support, and direction. In the case of PowerUp, Tretton says that also means letting the studio stay independent by remaining a minority owner.
“We want to have more of a mentorship role where maybe we take a board seat, but we’re not interested in joining the management team or taking the management team over,” he explains.
There are hundreds of SPACs out there, but PowerUp is relatively unique as a games industry-specific endeavor. Tretton says the lack of SPACs in the approximately $200 billion dollar games industry, especially as acquisition becomes a hotter topic, was part of what prompted him to start PowerUp with a group of leaders who are already familiar with the game space. That experience, Tretton says, is something that the handful of SPACs he’s seen dip into gaming so far have lacked, making the developers they’re courting mistrustful of what they’re peddling.
That experience is necessary, too, because PowerUp’s plan isn’t just to throw money at projects they think might be lucrative, but to actively grow a games company. Tretton says he’s looking for companies with strong management teams who already have an eye toward going public, with a valuation approximately between $1 billion and $2 billion. That sounds huge, but for comparison, Bungie was acquired by Sony for $3.6 billion – so imagine something around a third the size of the Destiny studio. Not tiny indie, certainly, but independent, and not massive. And Tretton’s not just looking at developers, either: PowerUp might grab a studio, a publisher, or a gaming-adjacent company in a field such as media, esports, or advertising.
Between Tretton’s experience in the industry, including with a number of actual acquisition deals, and his newly-formed SPAC, he obviously has a lot of insight about M&A in general. Even though it seems M&A deals seem to be cropping up everywhere these days, the public really only sees the final results, and none of the process behind them. Companies are discussing M&A deals the time, which is why rumors all about such conversations crop up constantly and may or may not pan out. Tretton explains that there are a number of reasons why deals fall through mid-discussion. There could be a single majority investor not involved in the day-to-day of the company that isn’t interested in the deal who ruins the entire thing. Or there could be an issue with valuation, which Tretton admits is a tricky subject both in terms of public understanding as well as that of the parties involved – one that involves stock calculus about both the actual amount the company is worth at the time, as well as its future potential.
“Valuation is when you start to bore gamers, but the basic definition of valuation is that your company is valued realistically, because if you’re going to get acquired, you want to drive the valuation up as high as you can to get as much cash as you can when you get acquired,” Tretton explains. “If you’re going to go public, you need to be very realistic about how you’re valuing your company, because the shares and the value of the enterprise are going to be based on what everybody views that to be. And if you inflate that, that lasts for a matter of days and as soon as you fail to deliver on that valuation and fail to deliver on your targets, the stock goes into the toilet.”
But during M&A discussions, parties will sometimes clash over the difference between the company being acquired’s perceived value of itself, and what its investors see based on data. That clash can go both ways, too – sometimes the investors don’t have a complete understanding of what the company can do, but sometimes companies overestimate their own capabilities and value. It’s a complex dance that requires buy-in from everyone involved.
And then there’s any number of other miscellaneous reasons a deal might fall through.
“People have a change of heart or somebody else comes in at the 11th hour and fills their head with a vision that’s different from what they originally subscribed to on either end,” Tretton says. “You’re in a letter of agreement, somebody comes in and turns their head or you see somebody that’s more attractive and you walk out on them. I’d like to think that would never happen, but I can tell you anybody who’s done these mergers will tell you that you better be talking to multiple players on both ends, because deals have a way of falling apart and you think you’re down the road with somebody and the deal falls apart. It’s very time consuming and it’s very costly to have that happen.”
So what’s behind the surge in games industry acquisitions lately? Tretton’s theory is that the boom is tied to the sheer number of gaming companies compared to 15 or 20 years ago combined with the skyrocketing figures that the biggest gaming companies are raking in each year. There’s simply more to be acquired, and more money to do it with. And, he adds, that’s a good thing.
“You’ve got some strategic mergers and acquisitions that I think are good for the industry, because if an Activision becomes part of a Microsoft or a Zynga becomes part of a Take-Two, that creates room for a new Zynga or a new Activision to pop up, and maybe somebody who is a fraction of the size of an Activision or a Zynga becomes the next Activision or a Zynga, and those guys are going to pull up smaller companies with them,” Tretton says. “So I think it’s a sign of growth in the industry and a sign of the value of the industry and it’s all positive.”
But what about the drawbacks? Will big companies taking over smaller ones stifle creativity at the companies being acquired? What about platform exclusivity for popular cross-platform franchises? Tretton is confident that, broadly speaking, these won’t be issues – or at least not significant ones.
“I think the relationship between the two companies is obviously much closer once you’ve acquired that company,” he says. “And hopefully Microsoft becomes a bigger priority for Activision than it was before they got acquired by Microsoft. But ultimately, they’ve been bought to drive their own profitability and grow their own business to benefit Microsoft and benefit the overall industry in that way.
“So I don’t think you’re going to see titles become platform exclusive…I don’t think it would make financial sense for them to take a Call of Duty and make it exclusive to Xbox platforms. And they certainly haven’t behaved that way in the past and I think that’s true of all the other mergers and acquisitions that you see that I think you’ll continue to see multi-platform development. It’ll just be done under the wing of the acquiring company, but they’re looking for that company’s business in profitability to be maximized. And the way to maximize that profitability is to do a multi-platform footprint.”
Certainly Tretton has a vested interest in making acquisitions sound like a good idea at the moment, but he’s also had a lot of time at the helm of one of the industry’s biggest ships, so he has a clear understanding where they might go wrong. With that experience and an eye to picking up a gaming company himself, Tretton wants to reassure that the increase in gaming M&A deals ultimately isn’t a shift that’s going to hurt the people playing games. Rather, he opes it will result in bigger and better games, and more of them besides.
“The gaming industry’s competition is not other gaming companies, it’s time. There’s still only 24 hours in a day. You got to sleep. And gaming is much more of a threat to other forms of entertainment than it is to other gaming companies. If you spend more time gaming, you spend less time watching TV.
†[But] the people at over-index in gaming are also the people who over-index in movie attendance…and everything else, so they’re just a very voracious consumer that is going to support any form of entertainment that appeals to them…These acquisitions from these big multi-billion dollar companies just show a bigger and bigger commitment to gaming. If I’m a gamer, there are more and more people concerned about going after my entertainment dollar and if they want my entertainment dollar, they better give me something really fun to do with my time. I see these as signs of people supporting the industry and supporting their hobby, not reducing their choices.”
Rebekah Valentine is a news reporter for IGN. You can find her on Twitter @duckvalentine†