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Kabam to Continue Buying Smaller Video Game Rivals

The studio behind “Kingdoms of Camelot” and “The Hobbit” is spearheading the uptick in M&A among game publishers in 2013, starting with its acquiring EBG

Kabam Inc., famous for developing the popular iPhone application “Kingdoms of Camelot”—a video game where players can build and rule over King Arthur’s land—has been busy taking over in its own right.

The San Francisco-based company purchased Exploding Barrel Games Inc. (EBG) on Wed., Jan. 16 for undisclosed terms—the latest in a series of acquisitions that have expanded Kabam’s presence on a global scale.

Kabam began its buying spree with Fearless Studios in January 2012, followed by Gravity Bear in March, Wild Shadow Studios in June and Balanced Worlds in December. The company currently has a presence in Austin, Texas, as well as overseas in Beijing, Luxembourg, and Saarvbrücken, Germany.

The deal for Vancouver-based EBG provides Kabam with an opportunity to not only branch out into Canada for the first time, but shake up its offerings, according to vice president and spokesman Steve Swasey.

Kabam, known for making complicated strategy games that are played via Facebook Inc. (Nasdaq: FB), mobile devices and its own Web site. had been looking to branch out into other genres, Swasey tells Mergers & Acquisitions.

“If we don’t have the capability internally, we go out and look for it,” he says, citing EBG’s publishing of racing and sports titles, such as “Need for Speed” and “FIFA.”

Kabam's CEO and founder Kevin Chou plans to continue this strategy in 2013, keeping tabs on smaller rivals and independent gaming studios that are rich in talent and intellectual property, Swasey adds. “It’s a build or buy scenario, and we’re doing both.”

Kabam isn’t alone. The entire video game industry is on the cusp of an M&A wave, with fewer buyers shelling out more money for developers and publishers than they have in years.

Transaction value within the gaming sector totaled $4 billion in 2012, surpassing 2011 levels of $3.4 billion, according to a report released on Jan. 16 by London investment bank Digi-Capital Inc. That’s more than 18 percent. Most of those deals took place between companies similar to Kabam, which are referred to as massive multiplayer online games. MMOs made up 38 percent of gaming M&A, while mobile games made up 27 percent. Console gaming trailed behind with just 4 percent.

While the total value of M&A saw a record high, there was a 27 percent spike in transactional volume due to fewer, but larger, deals taking place. There was a 60 percent increase in the average transaction size, to $49 million, the report continued.

Both the M&A and initial public offerings (IPO) in gaming delivered greater than 6 times return on investment between 2005 and 2012. Although the IPO market itself was weak in 2012, the report notes, it is expected to pick up in 2013 and 2014.

“It’s more difficult for a gaming company to go public,” says Paul Sieben, a partner at Silicon Valley law firm O’Melveny & Myers LLP, citing the uncertainty surrounding Zynga Inc. (Nasdaq: ZNGA).

Zynga’s valuation has slipped down to roughly $2 billion from a $14 billion figure before it filed its S-1 and began trading in December 2011.

However, Sieben, who advised Kabam on each of the company’s acquisitions, including the buy of EBG, expects more deals on the horizon, as opposed to companies going public.

“You’ll probably see more consolidation with bigger companies picking up smaller firms,” he adds.

So far, Kabam has raised more than $125 million in venture capital, including an investment from Warner Bros. Entertainment and Metro-Goldwyn-Mayer Studios Inc. The deal, announced in December, follows the two companies’ partnering to make “The Hobbit: Kingdoms of Middle-Earth,” a game based off of the The Lord of the Rings film series.

 

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