A tsunami of deals
Transactions in gaming seem to be announced daily. The torrid pace may not be sustainable, but the trend toward inorganic growth has implications for the future.
The gaming industry is at a defining moment, and disruption is bringing exciting opportunities to many players... but with opportunity, comes risk. Mergers and acquisitions, partnerships and other transactions are forming the basis for the omnichannel future for gaming, and transactions come with their own opportunities and risks.
KPMG LLP, the U.S. member firm of KPMG (“KPMG”), spent time at G2E 2021 (Global Gaming Expo) observing industry trends, talking to company leaders, and meeting the next generation of innovators. We found that the enthusiasm portended by the wave of M&A, IPO, and other deals is not an exaggeration. Many in the industry are excited about the road they are on, even with potential potholes and roadblocks along the way.
Buy versus build – inorganic growth is the story of gaming
We are in the midst of a massive wave of deals, both within gaming as well as across sectors – sports and media – and this wave hasn’t crested yet. To grow in the “traditional” land-based gaming industry, players were accustomed to a combination of buying (M&A and partnerships) and building (new construction, developing management expertise around customer service, and marketing, etc.). Many land-based operators pride themselves on the in-house skills they have developed in areas like design and construction that would commonly be outsourced to other sectors.
With gaming’s expansion into digital, we have seen that trend flip to an almost exclusive focus on the buy- side of growth. In a panel moderated by KPMG U.S. Gaming industry leader, Rick Arpin, participants noted several factors leading to this trend:
- Developing businesses across an omnichannel playing field is easier through M&A than organic growth.
- The pace of gaming expansion leaves precious, little time to develop capabilities. As difficult as M&A can be, it is still faster to market than developing in-house.
- Similar to the experience with online retail, there is a perceived need for first-mover advantage in online gaming.
Participants in a closed-door roundtable of industry leaders in corporate development highlighted similar themes. The focus was on M&A to obtain differentiated product offerings and the need to fully commit to an omnichannel strategy versus half-measures.
The nature and volume of deals are reflective of what we heard from industry experts throughout G2E – that the industry has a generational opportunity to leverage the current moment of excitement around growth to make a step-change forward. Specifically, the digitization of gaming could allow the industry to attract a new, diverse talent base, provide the chance to tell the story of gaming to a broader audience, and become more consumer-centric.
Big waves can crash hard
In a previous post, KPMG noted the common belief among industry leaders that regulation and regulators are acting as a governor on the pace of change. That hasn’t slowed the pace of deal activity, and the factors leading to such pace have some industry participants worried about a bubble atmosphere.
The availability of venture capital, private equity, and traditional IPOs and SPACs allowed some companies to accelerate their path to maturity, but perhaps skipping needed process and governance steps along the way. Those closest to deal-making advise for discipline… The next wave could yield better opportunities not seen currently in the shadow of the hard drive to capture “big one” we are seeing now.
Market pressure to realize the potential of deals is another source of risk. Throughout G2E, we heard worries that accelerating (and in some cases rushing) to build market share would cause a backlash of increased regulation in the United States similar to the experience in Europe in recent years.
How long will we ride this wave?
Leaders we spoke to believe the industry will continue on a path toward an omnichannel existence and a converged future with other sectors like sports and media.
This supports the results of our conversations on the future of deals.
Participants see the need for both more vertical (omnichannel) M&A as well as horizontal consolidation, since the consensus is that the market currently has too many participants. Given the need for consolidation on both “axes” of traditional M&A, many industry participants and analysts believe we are still early in the cycle, with another three to five years of increasing deal volume.
Another possibility is a cycle of consolidation followed by deconsolidation. Markets currently assign value to those obtaining ownership of the underlying technology of online gaming, and investors are most interested in vertically integrated and “converged” enterprises. But we’ve seen ebbs and flows in this approach in gaming and hospitality in the past, and there may come a time when the market assigns more value to separated businesses than “conglomerates.” This has implications for merger integration (already a difficult endeavor) in the near term and on organization, system, and process decisions for the years ahead.
Even as the tide of deals rolls in, we’re mindful that tides change. In the physical world, tides are predictable. The gaming industry, however, does not have the benefit of physics to predict the future. Companies should consider solidifying their capabilities in transactional areas akin to building a beachhead that manages incoming waves. Those with the skills to navigate, survive, and thrive the deal tsunami will be best positioned for the long-term realities of a more mature industry.
How can KPMG help you?
Let’s stay in touch. We invite you to review our Gaming portal for the latest insights, trends, events, and information on how we can help you manage growth, navigate risks, and transform your business.
Reach out to discuss how KPMG LLP can help with your next transformative transaction. We have a robust and mature transaction advisory service offering, and our team members have assisted in hundreds of sector deals involving operators, owners, suppliers, lotteries, online and more, including recent convergence transactions.
Together, we can shape the future of gaming – now.