Last year, one company, Aristocrat, made two of the largest moves in the social casino space. In August, Aristocrat announced it was acquiring Plarium for $500 million. It followed up that transaction by acquiring Big Fish Games from Churchill Downs in November for almost $1 billion. While there were other deals in the space last year, these two showed Aristocrat’s intention to try to dominate the space. While one of these transactions was very savvy, the other is one they are likely to regret.
I have been through many mergers and acquisitions, including several at the company that is probably the best at integrating new businesses, Disney, and there are two hallmarks to successful M&A (mergers and acquisition).
- The first key is that at least one of the parties adds value to the other party. The company that is being acquired could have a technology or expertise that makes the acquiring company more valuable. An example would be Google’s acquisition of DeepMind. Post acquisition, DeepMind was able to accelerate Google’s own AI efforts as well as potentially improve its search technology. The other type of benefit is where the acquiring company adds value to the company it acquires, either through tech, expertise or channels. An example here would be Disney’s acquisition of Marvel, where it used its superior film making skills to help Marvel separate its movie business from competitor DC Comics, owned by Warner Brothers.
- The second key to a successful acquisition is that the rationale is the combined business is more than the sum of its parts. An acquisition is not likely to generate long-term value if it is only meant to make a company bigger. If the number two company in a space buys the number three company it may become number one but that is not a real financial benefit (unless it paid below market price), the return on capital is likely to remain unchanged. Only if the combination makes the new entity more efficient does it generate a market return above a traditional investment.
As with all rules, there are exceptions. Private equity (PE) companies consistently have a strong return on investment by acquiring companies whose value can be increased by making them more efficient either organically or via combining them with other businesses. Even in these situations, however, the PE companies are actually adding value because they have an expertise in efficiency or an ability to acquire financing at a lower cost.
Looking through the lens of increasing value for one or both parties in an acquisition, it becomes much clearer where Aristocrat got it right and where it is likely to fail.
Big Fish Games
The Big Fish acquisition was a master stroke by Aristocrat. Big Fish, whose crown jewel is the Big Fish social casino app, has been one of the leaders in the social casino space for more than five years. In 2014, Churchill Downs acquired Big Fish for $885 million, hoping to grow the business even further. This was a case of not adding any value, however, as Big Fish did not boost Churchill’s core business and they were not able to help Big Fish grow.
Big Fish traditionally succeeded in the social casino space by layering true social features on a average to below average slots and casino product. The social features both kept core players engaged and drove high revenue from players, especially VIPs. Big Fish Casino was consistently in the top 5 percent of monetization, generating over $0.80 in ARPDAU, more than twice many of its competitors. Big Fish, however, has largely stagnated the last couple of years under Churchill’s ownership as other companies, such as Huuuge Games, have replicated the social features leaving Big Fish’s lower quality casino offering a liability.
Aristocrat, meanwhile, has grown from a major land-based slots developer to one of the top-five social casino companies. Combining its Product Madness social slots business (acquired in 2012) with their land based real money content, they have gone from an afterthought to a top social slots company. It’s Heart of Vegas title is consistently among the top-5 grossing title, often number one, and they dominate the world’s second largest social casino market, Australia.
By acquiring Big Fish, Aristocrat is likely to improve both the Big Fish business and its internal social casino efforts. Big Fish will benefit from access to Aristocrat’s land based slots content, eliminating its greatest weakness (mediocre slots). Big Fish should also gain market share in Australia, given Aristocrat’s dominant position there.
Conversely, Aristocrat will grow its core social business (Product Madness) by understanding how to bring the most valuable social features to social casino. These features have driven revenue for Big Fish (and competitors like Huuuge) but they are a challenge to implement. Big Fish’s expertise with social features is likely to improve the core Aristocrat social casino products.
The Plarium story is not likely to have as happy an ending. While Plarium is a very competent mid-core game company (with great games like Vikings) and Aristocrat is a great social casino company, there are few areas they can help each other. Plarium’s games appeal to a younger, male demographic while Aristocrat’s social casino (and land based) products appeal to older (55+) women. This is an awful starting point for cooperation. Few of Plarium’s players are likely to be interested in social casino games, and those who do are even less likely to be VIPs. Conversely, a social slots player is not likely to be interested in a mid-core combat game. Additionally, the product features that work in a combat game like Vikings will not be transferable to the social casino business while Plarium will learn very little from Aristocrat’s product management.
The best case for Aristocrat is that Plarium continues to grow its revenue and contribution and proves to be a sound financial decision. I say best case as the acquisition needs to be compared to any other investment since it will not improve the core business. The reality is most acquisitions fail and as Aristocrat is not adding any value to Plarium; for it to have a positive ROI simply in financial terms they need to have seen a better value opportunity than anyone else. Given the cost of the acquisition, I would not bet on it.
2018 will bring more deals in the social casino space, it’s not a prediction but an extrapolation of the past eight years. The deals that will be successful long-term are the ones that are symbiotic, where one of both companies brings additional value to the combined entity.
- Successful mergers or acquisitions are ones where at least one of the companies also improves the other company, not simply adding together financial results.
- Aristocrat’s acquisition of Big Fish is likely to be a successful acquisition, as Aristocrat can share its great real money slots content with Big Fish and Big Fish can provide its expertise in creating social features.
- Aristocrat’s acquisition of Plarium is less likely to end up a success, as they have completely different player bases and there is little opportunity for cross over.