How Embracer Became Europe’s Largest Gaming Group

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Lars Wingefors’ 13-year-old would approve of his recent purchase: Dark Horse Media, one of the world’s largest independent comics studios and home to iconic titles including Hellboy and city ​​of sin.

Thirty years ago, while studying at a secondary school in Sweden, Wingefors started selling second-hand comics and by 18 he had dropped out of sixth grade to focus on his fledgling business selling by correspondence.

The acquisition of Dark Horse, completed last month for an undisclosed amount, was part of a three-year buying spree that transformed Embracer Group from a small, obscure PC game developer into the biggest games in Europe by market capitalization, valued at Skr 93 billion ($9.9 billion).

“I think we’ve built something really unique that’s very difficult to replicate,” said Wingefors, founder and chief executive of Embracer, which owns a 23% stake.

Transactions have risen sharply in the gaming sector since the start of the pandemic. Big tech and entertainment companies have sought to claim a limited pool of talent and intellectual property and expand their exposure to an industry that already dwarfs other forms of mainstream entertainment.

Renaming his company from THQ Nordic in 2019 to embrace a new era of consolidation, Wingefors has been one of the industry’s most deal-hungry executives, seeking to build his empire into a formidable rival to France’s Ubisoft Take-Two. Interactive and Electronic Arts in the United States.

Since the start of 2020, as Wingefors flew over Europe on its private jet meeting game entrepreneurs, it has made 62 acquisitions with a total value of SKr 77 billion ($8.1 billion ). The biggest was a €2.75 billion acquisition of French board game company Asmodee in December.

But Wingefors, which is famous for its lighthearted approach to integrating acquired businesses, faces a daunting task in managing such a large and sprawling empire spanning different genres of interactive entertainment. Embracer, in constant evolution, already poses challenges for investors and analysts trying to measure its value against its peers.

Toby Clothier, an analyst at asset manager Mirabaud Securities, said the company was becoming “more and more incomprehensible”.

“With the best will in the world, Lars can’t know what’s going on, it’s impossible to keep track of it,” he added.

In its latest financial report, for the third quarter of 2021, Embracer reported a 135% increase in net sales to Skr 5 billion compared to the previous year, and a 70% increase in earnings before interest, taxes, depreciation and amortization at 1 Skr. 5 billion. It also posted 16% organic growth in its games division, independent of recent acquisitions.

Ken Rumph, games analyst at Jefferies, described Wingefors’ strategy as “anti-synergies” and “aggressively decentralized”, which sets it apart from other high-acquirer companies in the industry.

“It’s just kind of a pooled video studio fund,” he said, adding that Wingefors has at times seemed “oddly relaxed” in its rejection of the need to find ways to synthesize its business when there are has obvious overlaps.

But Wingefors believes it “isn’t that difficult” to manage a complex and growing network of 112 entertainment studios across Europe, stressing the value it places on selecting “entrepreneurs with a successful track record and let them do it.

“From a business perspective, we don’t have central business decision-making,” he said. “Looking at other companies, they struggled when they put in too many layers of directors and management and started controlling creators, that’s when they started to fall apart. ”

Gaming deals have grown over the past decade, hitting a record high this year in deal value, bolstered by Microsoft’s $75 billion acquisition of Activision Blizzard and the acquisition of Zynga by Take-Two for $12.7 billion.

Column chart of the value of global gaming M&A deals ($ billions) showing that deals in the gaming industry have increased sharply since 2019

The search for solid game titles and successful studios has made the landscape extremely competitive.

But in a success-driven industry, Wingefors has taken a more dispersed approach than its rivals. Embracer bought smaller studios that make lesser-known games, rather than blockbuster deals favored by companies like Sony, Tencent and Microsoft. Embracer’s roster includes loot shooter Borderlandsthe street gang adventure series Saints Rowand goat simulator, in which players simulate the life of a goat.

“If you can make one game, you have a big business risk, but if you make 200 games, like we do, the business risk is less,” he said.

This strategy works both ways, also reducing the risk of Embracer being devoured by bigger fish looking for so-called AAA games, the gold dust of the trading frenzy.

The partial return to normality after the worst period of the coronavirus pandemic and the outbreak of war in Ukraine have both somewhat dampened investor appetite in the sector, with most companies experiencing significant share price declines. their actions over the past year.

Still, Staffan Ekstrom, a partner in EY’s investment banking arm who’s worked on most of Embracer’s deals, is confident the pace of deals is likely to pick up as the battle for games continues. strong and new technologies are intensifying.

Wingefors said it plans to make a similar number of acquisitions in the months and years to come, and will look to expand into new markets, including the booming field of free games, as well as countries like the United Kingdom, the United States. , Poland, France and China.

But while it’s clear that Embracer’s acquisition strategy was well suited to gaming’s boom times, it’s less clear that Wingefors will be able to take its disparate empire to new heights during a time of greater turbulence. of the market. Embracer is heavily exposed to the effects of the war in Ukraine, with 1,000 employees in Russia, 250 in Belarus, and 200 in Ukraine, many of whom work on game development.

For Rumph of Jefferies, “the success of Embracer could be just an accident of timing”.

“The worry is that they’re going to spend more money just when consumers are about to pull their horns,” he said. “You think you’re a genius buying a bog-standard house in an average suburb and remodeling it thinking it’ll make more money. But in the end, it’s still just a standard house in one place.

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