Nintendo has billions of dollars in the bank. That’s money it could spend on tacos, Vegas gambling vacations, or — potentially — major acquisitions. The publisher is struggling right now, and a quick way Nintendo could shake things up — other than putting those billions on black at the Palms Resort — is to merge with another big company.
But is a merger or acquisition in Nintendo’s future? Possibly, but not necessarily.
Nintendo is facing tough times. The house of Mario expects to lose around $250 million for its fiscal year, which will end on March 31. That’s mostly due to the lacking performance of the Wii U home console. For the year, Nintendo only expects to sell 2.9 million Wii Us compared to an original project of 9 million. These troubles have Nintendo (and everyone else) talking about ways to turn things around.
That led to talk of Nintendo planning to make a merger or acquisition on English-speaking news sites. Interest in this potentiality peaked last week when Japanese financial newspaper Nikkei posted an interview with Nintendo president Satoru Iwata. As part of the answer to solve its current financial issues, Iwata said (as translated to English by Nikkei) that Nintendo is “considering M&As as an option.” He also explained that the company would buy back some of its stocks from shareholders for this reason.
Well, early this morning, Nintendo completed a major buyback of 9.5 million shares for $1.1 billion. The company picked up those stocks from the heir of Nintendo’s late former president, Hiroshi Yamauchi. Now that Nintendo has done that, should we expect the publisher to announce it is buying Square Enix or merging with Disney?
Adam Krejcik, Eilers Research managing director for digital and interactive gaming, doesn’t think so. Krejcik is Eilers Research’s expert on the gaming sector, and he has 10 years of experience in the field.
“It is always very difficult to predict M&As,” Krejcik told GamesBeat. “It’s even mores so when it comes to a big company like Nintendo that has a long operating history and has clearly fallen onto tough times.”
Krejcik explains that Nintendo could pursue three different scenarios. One, Nintendo could make an acquisition. Two, it could try to get acquired or merge with a larger company. Three, it could stick the course.
“I actually think scenario three is still the most likely after listening to Nintendo’s recent conference call update,” said Krejcik. “In this case, it will continue to make cost cuts. It could make executive changes. It could keep buying back shares, hope that things eventually improve.”
In that situation, Nintendo could use its savings to continue paying off its debts while it tries to turn things around without fear of default. Of course, this is also the least disruptive fix-it-now scheme that Iwata could implement.
Could Nintendo acquire other companies?
The first scenario, where Nintendo uses its cash hordes to acquire business, is also a possibility.
“Nintendo has the capital to make an acquisition, but I”m not sure they know what they want to buy,” said Krejcik. “Also, any deal would likely be pretty dilutive [to Nintendo's earnings per share].”
On top of those issues, you can’t exactly go out and get a bargain when acquiring a startup developer or tech company. Zynga recently paid more than $500 million to acquire NaturalMotion, a studio that makes a handful of somewhat popular mobile games. Prior to that, Zynga paid around $200 million for Draw Something developer OMGPOP in May 2012. Barely more than a year later, OMGPOP (at that point known as Zynga New York) shut its doors for good.
“For example, if Nintendo decided to do a 180-degree turn and go in the mobile direction, they could acquire a studio with one or two hit games generating under $100 million in revenues — that’s not exactly a game changer for a company that generated over $1.7 billion through its first nine months of fiscal 2013,” said Krejcik.
Regardless of the risk, Nintendo might go for something along those lines, but only if it has a clear goal in mind.
IDC research director Lewis Ward doesn’t think Nintendo is serious about making something like this happen in the near future. Ward is in charge of looking forward at the future of gaming for IDC.
“I doubt we’ll hear about any significant acquisitions this year,” Ward told GamesBeat. “Mr. Iwata cracked the door open, but it’s not much different than a nuclear superpower saying ‘all options are on the table’ when confronting a significant threat. I didn’t get the sense that anything is imminent.”
We’ve reached out to Nintendo to ask it to elaborate on its M&A plans, but the publisher has not yet returned our request for an answer.
What about a merger with a larger corporation?
Nintendo might consider merging with something more its size, but this is the least likely of the three scenarios for now.
“This is what most shareholders would like to see, but to me, this is a long-shot,” said Krejcik. “This would be the rumored Sony or Disney making an acquisition [out of Nintendo].”
The issues with a deal like that are manifold. Disney — to pick a common subject of rumors — and Nintendo would have to agree on a strategy and pricing, but it would also have to figure out the cultural fit. That would present a major hurtle for a U.S. and Japanese pairing. Maybe, Sony wouldn’t have those issues, but it has financial troubles of its own.
“Even if Nintendo decided M&A is a critical part of their response to the current situation, they’re a deliberate company,” said Ward. “They’re going to be really careful about [major deals] and the due diligence process would be protracted.”
If a company were to make a move to pick up Nintendo, it likely wouldn’t come from something familiar to gamers like Disney or Sony. Instead, expect something like Japanese gaming-focused investment company Softbank or Chinese investor Tencent to make that move.
“Softbank has made some big investments into digital game space, most recently Puzzle & Dragon developer GungHo and Clash of Clans studio Supercell,” said Krejcik. “Softbank certainly has the capital to make a Nintendo acquisition, but I’m just not sure how interested they would be.”
Tencent is also a major game investor. The company owns League of Legends studio Riot Games as well as a majority of Epic Games, which previously made the Gears of War games.
While Nintendo has resisted going mobile or publishing games for other consoles or PC, any company that would acquire it would likely want to change those policies.