First quarter game investments and acquisitions gather steam

The consolidation of companies in the social game market has begun, according to first-quarter data gathered by game-focused investment bank Digi-Capital. In the first quarter of 2012, 30 merger and acquisition deals generated $1.7 billion in transaction value at an average of $57 million, the report said.

Tim Merel, managing director at Digi-Capital, calls it ConsolidationVille. While social game companies continue to grow revenues and profits, many of them may be looking to be acquired.

” So 2012 could be shaping up as a bumper year for games M&A. Our comparison of the top 50 Facebook companies indicates that some social game companies continue to do well in terms of revenue, profitability or both,” Merel said. “However, our analysis also indicates that many social games companies might be struggling on one or both measures, which could be the catalyst driving consolidation in the sector.”

Zynga’s $180 million purchase of OMGPOP, the maker of hit mobile game Draw Something, will likely change the investment dynamics in social games. Well-funded competitors will likely try to manufacture a hit in hopes of being acquired at a high value. That could work, but it has its risks. Other players are likely to take a more measured approach of building a strong portfolio of games. Merel said that King.com, Wooga and Peak Interactive show the latter characteristics.

Social gambling (driven by hopes of changes to U.S. laws on online gambling) has emerged as a driving force for social games mergers and acquisitions. IGT paid $500 million for Double Down Interactive, a fast-growing Facebook casino game maker with just 70 employees. Caesars-Harrah’s $90 million purchase of Playtika was another big acquisition in this category.

Last year was a record for M&A in games, with 113 transactions generating $3.4 billion in transaction value, with an average deal value of $30 million. In the first quarter, the average size of the deal is up 90 percent from the average in 2011.

Investments in games in 2011 added up to $2 billion in transaction value across 152 investments at an average investment amount of $13 million. In the first quarter, 38 transactions generated $248 million in transaction value, at an average value of $7 million. That confirms average round values have fallen, but my own interpretation is that it may confirm anecdotal evidence that valuations have fallen for game startups. In the first quarter of 2012, most of the deals were related to mobile and massively multiplayer online games.

In 2011, social and casual games were 57 percent of transaction value and 32 percent of transaction volume. But in the first quarter, it accounted for 3 percent of transaction value and 16 percent of transaction volume.

“So our view that Social Games 1.0 is in consolidation mode could continue to be an ongoing trend through 2012, as the VC market appears to have slowed down its frenetic pace of social games investment from 2011,” Merel said.

Mobile games were 30 percent of transaction value and 39 percent of transaction volume. Mobile could continue to be the driving force for investments in 2012. The success of the free-to-play model, where users play for free and pay real money for virtual goods, seems to be attracting more investors to MMOs, which are 43 percent of the transaction value and 21 percent of transaction volume. The strongest Chinese and South Korean companies are actively looking to acquire and invest in mobile, social-mobile, and free-to-play MMOs. The action is in both the U.S. and abroad.