Mergers and Acquisitions (M&A) are a regular occurrence in the business world. Companies often find reasons to consolidate their holdings for the formation of a new business entity. The new business entity is often stronger and better positioned for success than any of the original companies is. The eGaming industry has undergone a number of transitions and can now be considered to be in a mature phase recording its fair share of M&A activity.
In 2012, Digi Capital reported that M&A activity in eGaming was valued at $4B. The report noted that transactional volume of M&A in the eGaming industry declined by 27%; hence, we can posit that eGaming firms are doing fewer but bigger merger and acquisition deals. The eGaming industry has witnessed an upsurge in mergers and acquisitions (M&A) activities in recent times. This article seeks to provide a comprehensive coverage of recent M&A activity in the eGaming industry and indentify trends that could trigger consolidation activities going forward.
Success stories in eGaming M&A
· Betfair and Paddy Power
In 2015, Paddy Power and Betfair agreed to form a merger after months of due diligence and negotiations. The merger of the two firms would lead to the creation of a new firm called Paddy Power Betfair. On the completion of the merger, Paddy Power Betfair became one of the biggest online gambling houses in the world with more than 7,000 workers on its payroll.
Gary McGann, the chairman of Paddy Power observed that “the merger of Paddy Power and Betfair will create a company of world-class capability and people who will deliver substantial up-front synergies and a platform for very exciting business expansion.” Gerald Corbett, the chairman of Betfair, in his remarks said that the merger made “huge strategic sense by bringing together two industry-leading and successful businesses and providing enlarged scale, capability and distinctive, complementary brands”.
The deal was designed to help both firms navigate the new tax and regulation regimes in their countries of operations. More so, the shareholders expected the merger to lead to combined sales of £1.2bn and almost £50m in annual cost savings. Interestingly, in May 2016, the Telegraph reported that the merger between Paddy Power and Betfair is already paying off handsomely with a £11M profit boost.
· Ladbrokes and Gala Coral
In July 2015, Ladbrokes and Gala Coral agreed on a merger deal that will lead to the creation of a gambling juggernaut in the UK. The new company will be called Ladbrokes Coral and will have 4,000+ betting shops and more than 30,000 employers. If the deal goes through, it would lead the creation of a £2.3bn gambling giant, which would easily be the biggest bookmaker in the UK.
Ladbrokes has a 136-year history but the firm has become too enmeshed in traditions and didn’t initially embrace the changes with Gaming. Gala Coral is a private equity-owned firm at the forefront of digital technology and gaming but without the history and market penetration that Ladbrokes has. The merger of these two firms has the potential to lead to the emergence of a large but dynamic firm that can embrace change without discarding its history.
The merger deal is subject to conditional approval from the Competition and Markets Authority and the merging might require the closure of some bricks and mortar betting shops to satisfy antitrust authorities. Nonetheless, it’s clear that the merger would help both Ladbrokes and Gala Coral to obtain strategic positioning in the industry. Interestingly, Totally Gaming reports that the Ladbrokes and Gala Coral merger deal might be completed and confirmed this week.
Failures in eGaming M&A
· Entraction poker network by IGT in May 2011
The eGaming industry has its fair share of failed merger and acquisition deals. One of the most prominent failed M&A activities in the eGaming industry is the acquisition of Entraction Poker Network by International Game Technology (IGT) in May 2011. In 2011, IGT acquired Entraction for about $115M – a price tag that many industry experts considered expensive.
IGT made the acquisition to leverage Entraction’s (previously known as B2B) pool of U.S. players, however the introduction of the UIGEA regulation within the safe port act closed the U.S e-gaming market. Since the acquisition of Entraction, IGT has been making a protracted effort to divest Entraction from IGT ever since. IGT CEO Patti Hart says it is important for IGT to divest Entraction because eGaming has “shifted from dot-com to dot-country.’’
IGT has since been pursuing other interests in eGaming IGT purchasing DoubleDown Casino for $500M in January 2012. However, analysts have considered DoubleDown Casino to be another melon because it is dependent on the firm's ability to monetize social gaming.
Challenges in M&A Activities for eGaming companies
As exciting as mergers and acquisitions in the eGaming industry can be, it is not without some attendant challenges. One of the major challenges that firms face in the process of M&A is the regulatory framework for such merger and approvals. Companies must satisfy antitrust regulations before they can successfully merge, acquire or be acquired. For instance, in the case of Ladbrokes and Gala Coral mentioned earlier, the merging companies had to close some their shop in some locations in order to ensure that they won't become monopolistic in their operations.
In some instances where the merging companies are registered in different countries, both firms must satisfy regulatory approvals in their respective controls before the merging can scale through. For instance, Betway Gaming Ltd might have strong enough reasons to consider joining forces with Bwin or another bigger player. Paddy Power is based in the UK while Betfair operates from the Republic of Ireland – the merger had to go through approvals in both Ireland and UK before it was confirmed.
In cases where either or both of the merging companies is a publicly traded firm, the merger might need to get the approval of shareholders before it can be ratified. Sometimes, the management and shareholders might see things differently and the differences could slow down or halt merger talks.
For instance, analysts at stockbroker Jefferies warned shareholders when Ladbrokes wanted to merge with Gala Coral. In the words of the analysts, “We think Ladbrokes is in the last chance saloon, having today announced a profit warning, a dividend cut, a share placing and an intended merger… We remain skeptical about the merits of the strategic review and proposed merger with Gala Coral, and see gamblers as the only beneficiaries of what could prove to be a marketing ‘race to the bottom’.”
Why some succeed and other don't
Mergers and acquisition is often the only solution that can ensure sustainable survival and profitability within eGaming as more and more countries move from grey to white markets. Acquisition of a smaller niche player by a bigger player provides an opportunity to enter the new market faster. More so, revenue in eGaming often depends on sufficient player volumes; some brands won't naturally reach the critical mass they need to survive alone. Hence, smaller firms might need to consolidate to join forces in other to compete effectively with a larger rival.
However, sometimes the benefits some firms going through merger and acquisitions don’t enjoy the benefits of M&A. One of the reasons behind the failure of some eGaming M&A activities is the marriage of strange bedfellows. In some instances, some companies are just not compatible and their merger or acquisition often leads to problems down the road. The bottom line is that successful M&A often depend on win-win situation in which the merging firms have complementary core competencies.
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