News & Analysis

Sega, the Japanese game studio behind the popular "Sonic the Hedgehog" series, is adding more cartoonish creatures to its repertoire: the angry birds.

The Tokyo-based corporation agreed Monday to buy Rovio, the Finnish mobile-game studio behind "Angry Birds," for €706 million (about $776 million). The offer represents a 19% premium to Rovio's closing price Friday and is pending approval by both companies' shareholders.  Amid a difficult environment for exits overall, the deal signals that large acquirers still have an appetite for startups and smaller competitors.

Exit activity for gaming startups slowed dramatically in 2022, according to PitchBook data. IPO and M&A momentum for gaming companies has been curtailed, in part by a challenging regulatory environment following Microsoft's proposed acquisition of "Call of Duty" maker Activision-Blizzard and the end of pandemic restrictions that had benefited the industry.
 
Michael Pachter, managing director of equity research at investment bank Wedbush Securities said the nature of creating games fuels hunger for acquisitions.

"[A game studio is] an impossible business to build," he said. "It's hard to come up with a great game idea and hopefully make a billion dollars. … It's build vs. buy—and most people will buy because they can't build it."

The Sega-Rovio deal follows a string of acquisitions in the mobile gaming space in recent years. Zynga, the creator of "FarmVille" and "Words with Friends," was purchased for $12.7 billion in May 2022 by Take-Two Interactive Software, the publisher of the "Grand Theft Auto" series. Electronic Arts bought Glu Mobile for $2.1 billion in April 2021. A part of Microsoft's acquisition of Activision-Blizzard for $68.7 billion, announced in January 2022, would include mobile game-maker King, the creator of "Candy Crush."

"Startups will face a healthy appetite for M&A, albeit not at the levels of the previous two years," said PitchBook analyst Eric Bellomo. "Strong IP will be key in acquisition targets."

Rovio has been the target of many acquisition attempts in the past. Zynga had attempted to purchase Rovio in 2011 for $2 billion. More recently, Israel-based Playtika made an offer in January for €683 million (about $746 million), Reuters reported.

Neil Macker, an analyst at Morningstar, says mobile-only games companies make for prime acquisitions. (PitchBook is a Morningstar company.)

"Despite a slowdown, there's still a lot of interest in this space from traditional and nontraditional companies to move into the space," Macker said, citing Netflix's purchase of several game studios in 2022 as an example.

"It's a tougher environment to raise cash," he said. "I still think there's an appetite for buying mobile or smaller game companies."

Featured image by OlegDoroshin/Shutterstock