M&A Master Class: Chris Petrovic Teaches Acquiring Great Gaming Companies
Get ready for a real treat if you've ever been curious about the M&A in the gaming industry. We're about to explore what a typical work-week looks like for a Mergers & Acquisitions executive, navigate through the major obstacles that can obstruct deals, and stay at the forefront of the latest trends in the gaming industry M&A. And there is more, of course.
Our special guest, no other than Chris Petrovic, is going to be your masterclass host. Can you feel the excitement building? You should be, because Chris is the undisputed sensei of Mergers and Acquisitions, in the words of Mishka.
Describing Chris in a sentence or even several paragraphs is a challenge in itself. His career path reads like a one-of-a-kind top-scoring board, filled with remarkable expertise and insights. As the current Chief Business Officer and Board Member at FunPlus, an independent game developer and publisher, Chris has traversed through a myriad of remarkable roles. These roles include serving as an SVP and Head of Corporate Strategy, M&A, and Business Development at Zynga, SVP and Head of Corporate Strategy and Development at Kabam, and Vice President and General Manager, Digital Ventures at GameStop, among others. He's also a mentor, advisor, and board member at numerous influential companies.
During this podcast, Chris shares invaluable insights from his time at Zynga, where he played a pivotal role in strategic M&A, forming partnerships, and expanding into new markets, including acquisitions of notable companies and licensing agreements with entertainment giants.
To make sure you don't miss out on all the valuable insights and juicy bits, I recommend listening to the full podcast episode on your platform of choice. It's an excellent way to dive deeper into the discussion and gain a comprehensive understanding of the topic. Enjoy the podcast!
If you want to get right into the details, here's my summary of what was discussed.
Why Do Game Companies Venture Into M&A?
What motivates them to take the plunge into this high-stakes arena, where success rates can be as shaky as 10 to 30%?
Let's kick off our exploration by understanding why game companies dive into the realm of M&A. Chris brings us insights from his extensive journey in this field. It all boils down to innovation and creativity—the driving forces behind gaming. Game companies are inherently wired to push boundaries and keep evolving. This drive mirrors the spirit of innovation seen in industries like medical tech, where companies invest heavily in research and development.
When we explore these R&D-driven environments, it’s clear that smaller players often take centre stage, and understandably so. They possess a unique talent for crafting innovative products and services in ways that big corporations can only dream of.
And let's not forget the "1 plus 1 equals 3" equation: when these smaller companies get acquired, they gain access to the scale, experience, and financial muscle of the acquiring entity. It's like giving their vision a serious turbo boost. So, it's no surprise that even though the odds of success aren't exactly stacked in their favour, most still want to jump into this game or at least give it a shot.
Mishka steps in to unveil the five fundamental reasons driving companies into the gaming industry M&A. These tangible motivations guide companies in their quest for growth and success:
Revenue: Acquisitions can significantly boost a company's revenue by adding new products, services, or user bases.
Profit: Companies often acquire others to increase their profitability, either by reducing costs through synergies or by entering more lucrative markets.
Audiences: Acquiring companies can expand their reach by gaining access to a larger user base or a new demographic.
Expertise: Acquiring a company with specialised knowledge or technology can enhance a company's capabilities and competitive advantage.
Strategic Early Bets: Sometimes, companies make strategic acquisitions to position themselves early in emerging trends or markets, gaining a first-mover advantage.
These tangible motivations significantly influence the decision-making process and strategies in the gaming industry M&A.
Chris takes the discussion further by highlighting the crucial role of high-level strategic alignment, often referred to as the "North Star," in any successful M&A venture. This strategic compass not only helps determine which of the five acquisition pillars to prioritise but also ensures that the journey stays on a well-defined course.
A prime example of this strategic alignment can be seen in Zynga's approach, where their "forever franchises" guiding principle permeates every aspect of the company's operations, from corporate development to HR policies, ensuring a focus on long-term, enduring value in the ever-evolving world of gaming.
A Peek into the Life of an M&A Team
So, what does a typical work-week look like for an M&A team? From Chris’s experience, it's labour-intensive in more ways than one. Without going into excessive detail, I’ll break it down into the following categories that Chris mentions on the podcast:
Deal Sourcing and Fielding:
During Chris's tenure at Zynga, a crucial part of his weekly routine revolved around deal sourcing and fielding. This process involved staying in touch with a substantial number of companies, typically ranging from 300 to 500 each year. These companies entered their radar through various channels. Some were the result of proactive outreach efforts, while others came to the team's attention due to inbound inquiries from the companies themselves or their advisors. On occasion, potential targets even surfaced during their travels.
Once these companies were integrated into a comprehensive database, Chris and his team maintained meticulous records of their interactions. This systematic record-keeping ensured that they always had a clear understanding of who on the team had spoken with whom, the timing of these conversations, and the topics discussed.
This well-organised system also allowed for seamless transitions when team members were added or removed over time. They were determined to prevent any scenario in which a company engaged with them through multiple channels, leading to confusion and potentially damaging their professionalism and credibility.
Data Analysis and Documentation:
Chris was quick to point out that data takes the front seat when it comes to the work week in an M&A team. In this day and age, it's all about data-driven decision-making, no doubt about it. So, yes, you can bet that the M&A team's calendar is chock-full of data analysis. They dive deep into market data, conduct exhaustive company analyses as they gather information on potential targets, and so much more.
Another not-so-surprising part: M&A teams spend a significant chunk of their time crafting presentations. It's a never-ending cycle of putting together PowerPoint slides for internal discussions, board meetings, committee presentations, and various other occasions. These presentations are the backbone of their communication strategy, making sure that everyone involved is on the same page and well-informed.
Gameplay and Feedback:
Fortunately, it's not all work and no play in the world of M&A executives. Chris and his teammates at Zynga understood the significance of going beyond data and documents. They've made hands-on gaming an essential part of their professional journey to acquire a deep understanding of the products and services.
Each member of the Zynga team received a monthly stipend—an allowance of $100 to spend in-game currency on any games they chose. This practice allowed them to fully immerse themselves in various games, gaining firsthand experience of monetization models, community dynamics, and gameplay mechanics. It wasn't just about understanding the games; it was also about actively participating and providing valuable consumer feedback.
During discussions about potential acquisition targets, team members who had played the games brought invaluable insights to the table. Their firsthand experiences added a crucial consumer perspective, enriching the team's analysis and ensuring a comprehensive assessment of potential targets.
Overcoming Key Challenges in M&A
In the fast-moving world of M&A, two significant challenges can feel like tackling rough terrain, but overcoming them is the key to a smoother journey.
Challenge 1: Building Consensus
The scenario that commonly unfolds involves the seller, typically a company, requiring approval not only from its board but also from shareholders, employees, executives, and investors. Each of these stakeholders brings their own unique concerns, questions, and expectations to the discussion table. Sometimes, they even want to directly engage with potential buyers. While this open dialogue is crucial for building trust, it can also extend the timeline of the M&A process. In the grand scheme of things, though, it's just part and parcel of doing business.
To conquer this challenge, transparency and collaborative effort become the guiding principles, as highlighted by Chris. He and his team at Zynga placed a high priority on clearly communicating their intentions, objectives, and vision to the seller's stakeholders. They aimed to ensure that everyone understood why this deal was on the horizon and what success looked like from their vantage point. Simultaneously, they were enthusiastic about hearing the other side of the story, understanding the seller's aspirations for the business and how they envisioned the future.
Challenge 2: Company Readiness and Professionalism
Company readiness covers a wide spectrum, from the day-to-day professionalism of their operations to their proficiency in tools and data management. When you're in negotiations with a potential seller, you'd ideally step into their data room and find everything neatly organised and handled with a high degree of professionalism. Unfortunately, reality doesn't always align with this ideal.
Some companies, regrettably, overlook the essential "plumbing" – the inner workings of their organisation. This oversight becomes glaringly evident when you start digging into their financials, contracts, and records. If their financial books are in disarray or lack professionalism, it inevitably raises questions about their overall competence. After all, if they can't effectively manage their own affairs, it naturally leads to doubts about how they can positively contribute to a larger organisation, particularly if it's a larger or publicly traded entity.
This state of readiness, or the lack thereof, emerges as a pivotal factor during the diligence process. It compels Chris and his team to take a moment and reflect on what it implies for the business's future. It's not solely about the numbers; it pertains to the organisation's capacity to seamlessly integrate into their operations and uphold the established standards.
Ultimately, it's all about cultivating trust, nurturing transparency, and meticulously considering the broader picture – a journey aimed at creating value and fostering growth through strategic partnerships.
The Factors Leading to M&A Deal Failures
Mergers and acquisitions are often seen as lucrative opportunities, yet studies show that a significant percentage, ranging from 70% to 90%, do not unfold as anticipated. The primary culprits are the challenges encountered during the post-merger integration phase.
The crux of the matter lies in the execution of the integration framework, a stage that can prove to be a significant stumbling block. It is crucial to understand that there are distinct approaches to post-merger integration, and the choice between them profoundly influences the outcome of the deal.
To shed light on these post-merger challenges, Chris takes a moment to revisit and explain the foundational concepts underlying the most prevalent deal types. He classifies them into two primary categories: outright acquisitions and earnouts.
Outright Acquisitions, in essence, involve the immediate purchase of a company or asset, typically for cash or equity. Compensation is provided upfront, and this approach is characterised by its "all-or-nothing" nature.
On the flip side, earnouts represent a performance-based approach that demands detailed agreements and specific performance milestones over a predefined time frame. Additional payouts are contingent upon achieving predetermined objectives, requiring a more hands-off approach.
The choice between these two approaches significantly shapes the post-merger integration process. Earnouts, with their emphasis on performance, allow for a lighter touch from the acquirer, granting acquired entities the autonomy needed to reach their performance targets while preserving their unique culture and business methods.
Successful M&A hinges on respecting the identity of the acquired entity and meticulously implementing an integration strategy tailored to the negotiated terms.
Chris's perspective highlights the value of a "do less to do more" approach, a mantra that guided Zynga. Acquiring entities can provide a menu of optional services that the acquired entity can choose as needed. This approach fosters collaboration, ensuring that value-added services align with the acquired entity's objectives.
To sum it up, the high rate of M&A deal failures primarily stems from challenges in post-merger integration. The choice between outright acquisitions and earnouts significantly influences the integration process. Success hinges on understanding the unique requirements of each approach and implementing a customised integration strategy that respects the acquired entity's culture and brand identity. By adopting a hands-off approach in earnout-based deals and offering value-added services as optional resources, companies can maximise their chances of creating value and synergy in mergers and acquisitions.
Assessing Cultural Fit Between Companies
The cultural fit between companies plays a pivotal role in M&A success. Mishka is genuinely intrigued by the vast array of companies within Zynga's diverse portfolio. Some of these entities appear to be polar opposites in their business approaches, leading to a burning question—how exactly do you determine if two companies are a good cultural match?
According to Chris, the first step in assessing cultural fit is to invest significant time upfront in building interpersonal relationships. This isn't a mere formality but a deliberate effort to align the leadership teams, often starting at the founder and C-suite levels. Through these top-to-top engagements, both parties can discern whether they share a common vision and values. This initial groundwork is essential for laying a sturdy foundation of trust and mutual understanding.
But cultural fit isn't just about personalities; it delves deeper into shared values and beliefs. To achieve this alignment, it's crucial to engage in candid and open discussions. These conversations ensure that both companies can collaborate harmoniously and have confidence in fulfilling their commitments. This alignment isn't just vital for the immediate success of the integration process; it's the bedrock upon which a lasting and sustainable relationship is built.
Face-to-face meetings play a significant role in this assessment. These interactions provide a genuine sense of how each company operates and how its people communicate. It's not just about what's on paper; it's about real-world compatibility.
Chris further emphasises the importance of nurturing the relationship from the very beginning, drawing an analogy to dating. Just as individuals need to ask questions, share information, and genuinely get to know each other in the early stages of dating, M&A counterparts must invest in building a connection that transcends the transaction itself. This emphasis on building a strong initial connection is particularly significant because mergers and acquisitions often evolve into enduring, long-term partnerships.
Additionally, both Chris and Mishka underscore the weight of a company's reputation in assessing cultural fit. The acquiring company's reputation carries significant influence, encompassing not only its financial standing but also its business practices and the character of its team. A positive reputation fosters trust and confidence, while a negative one can cast doubt and complexity over negotiations.
Trends That Steer M&A Strategies Today
Chris highlights a notable shift in the M&A landscape, marked by a decline in the number and size of large-scale deals. In the past, it was common to witness a multitude of multi-billion-dollar transactions. The present trend tells a different story—there's a decrease in the size of deals, and the focus has shifted towards smaller-scale acquisitions. This shift became particularly prominent after the IDFA (Identifier for Advertisers) changes, which really shook things up in the industry.
What's behind this shift? It's not just one thing but a mix of factors. Market uncertainty, those ups and downs in valuations, and the varying availability of capital have all played their part in reshaping the M&A landscape.
Despite the challenges that the market has thrown our way, the gaming industry is standing tall. Chris makes it clear:
“There's no doubt about the long-term success of gaming. It's always going to be the kingpin of entertainment. Mobile gaming, in particular, is here to stay and will remain the dominant force in gaming. Plus, there are still plenty of growth opportunities, whether we're talking about expanding the audience, exploring new geographies, or diving into different platforms.”
So, what's on the horizon?
Chris suggests that looking ahead, there's a feeling of cautious optimism that the M&A landscape will find its footing again, maybe by the first half of 2024. During this period of transition, deal strategies might involve aqua hires (snapping up talent) and more modest-sized roll-up acquisitions, with a laser focus on managing risk. And as the market steadies itself, we might see the big players make a return.
And, as Mishka rightfully emphasises, many companies are all about safeguarding their capital these days. They're holding onto their cash reserves in light of the uncertain market conditions. This strategy becomes even more critical in today's high-interest-rate landscape, where those cash reserves can generate some serious revenue. It means companies need to be extra careful about managing risks and being choosy when picking which companies to acquire.
