This article has been written by James Sibi, pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

The pandemic has created a boom in many sectors, especially among gaming startups. We can witness a lot of mergers and acquisitions happening in the industry. One of the main acquisitions is that of an Indian startup named Playsimple by the  Swedish company,  Modern Times Group (MTG) for $360 million. Unlike most acquisition deals, this one was a cash exit where every stakeholder made a killing. This article dissects and analyses the rationale behind the acquisition and how it changed the game of acquisitions i n the gaming industry.

The state of the gaming industry in India as well as in the global market

Indian gaming industry still has a long way to go to compete with the giants. China made a revenue of about 15.45 billion USD  and India generated just above 1 billion USD from the gaming sector in the year 2020. The annual growth rate is expected to be about 50 %, which makes it one of the best choices for investments and acquisitions. There are plenty of reasons like growth in sales of mobile phone and internet users, lower data costs and the pandemic lockdowns which created such massive growth in the Indian gaming scenario.

Gaming developers are looking further to explore the gaming sector more due to the increase in the number of smartphone users. At a global level, the gaming market is valued over $100 billion which is worth more than the movie and the music industry combined. A lot of investors find Indian gaming startups as a suitable opportunity that possesses a lot of potential for the future.

Playsimple : an overview

PlaySimple is a Bangalore-based startup that develops free online word games. The business was started in 2014 by brothers Siddharth and Siddhanth Jain, together with Preeti Reddy and Suraj Nalin. The executive team has considerable gaming industry experience, most particularly from Zynga.

PlaySimple now has around 215 full-time workers and is one of India’s top interesting and fastest-growing mobile gaming startups, which follows a mission to create easy, meaningful casual games at a huge scale, backed by world-class technology. PlaySimple has caused a global network of chart-topping games since its beginnings, over 75 million installs across its products to date, including evergreen classics like Daily Themed Crossword, Word Trip, Word Jam, Word Wars, and Word Trek. Furthermore, the business has four additional games in the works for release in 2021, two of which would be card games, another genre for PlaySimple. PlaySimple has created effective advertising technology, allowing for more revenue, extra efficient acquisition, and cross-promotion across MTG’s gaming sector. In the fiscal year 2020, PlaySimple’s sales increased by 144% to $83 million, with adjusted profits before interests, tax, depreciation, and amortisation of $18 million. Since its beginning in 2014, the firm has raised a total of $4.5 million and become profitable in 2019-20, with a revenue of Rs $5.1 million.

Daily Themed Crossword, PlaySimple’s most successful product to date, is now the highest-grossing game at PlaySimple. It was founded three years ago and has a lot of interesting, themed crossword puzzles that engage and challenge the company’s players regularly. This lighthearted twist on classic crosswords appeals to people of all ages and has enthralled over 11 million players worldwide. Elevation Capital and Chiratae Ventures were early investors of the firm and they are also transferring their shares as part of this acquisition.

MTG : an overview

Modern Times Group is a Swedish firm that works in the entertainment and e-gaming industries. MTG started operating in the mid-1980s when Swedish manufacturing group Industriförvaltnings AB Kinnevik decided to enter the rapidly expanding Scandinavian television market. 

The company comprises brands such as InnoGames, ESL, and DreamHackand which mainly develops strategy games. The firm makes money on a global scale, with its activities centred around Europe. MTG also controls InnoGames, a city-building and strategy game developer, and Kongregate, a mobile game publisher.

Acquisitions are an important component of MTG’s strategy. Since December 2020, it has acquired three gaming companies: mobile gaming racers studio Hutch Video games for $275 million (excluding performance-based payouts) in December, New Zealand-based tower defence gaming studio and author Ninja Kiwi for approximately $141.3 million (excluding performance-based payouts) in March, and now PlaySimple. It also owns InnoGames, a city-building and strategy game creator, and Kongregate, a mobile game developer.

Playsimple and MTG business deal

Elevation Capital (formerly SAIF Partners) and Chiratae Ventures, which invested around $4 million at a valuation of $16 million in 2016, will depart as part of the deal. Elevation Capital owned 19.7 percent of the firm, while Chiratae Ventures owned 14.4 percent. The business has raised $4.5 million in total.

After Byju’s purchase of WhiteHatJr for $300 million (about Rs 2,241 crore) in August of last year, this is one of the largest exits for an Indian business. While the cash payment is expected to be completed by July 29, the share transfer will take place following regulatory approvals, according to the company.

The agreement includes further performance-based incentives worth $150 million in cash.

Financing 

MTG will acquire 100 percent of the shares in PlaySimple through its subsidiary MTG Gaming AB for a total payment of approximately USD 360 million. The goal is to pay 77 percent cash and 23 percent in MTG class B shares as an upfront payment. The transaction will be completed in two stages due to Indian foreign exchange rules and regulations. The first stage, which is scheduled to be completed on or around July 29, would see MTG purchase 77 percent of PlaySimple’s shares. Following approvals for the founders to accept the share consideration, the second step will be completed in which the founders will receive 6,194,343 MTG class B shares (the “Consideration Shares”) in exchange for the remaining shares in PlaySimple (equivalent to a value per MTG class B share of SEK 115.16, which corresponds the 20-day volume-weighted purchase rate of MTG class B shares.

The Consideration Share would be subjected to lock-up obligations for a period of up to 24 months. MTG will call a General Meeting to issue MTG Class shares, which will be held in treasury until regulatory approval is obtained, at which point MTG class B shares (converted from class C shares) would either be transferred to the PlaySimple founders in return for the shares held, or sold to replace the cash payment. Any issued class C shares shall be excluded from the authorisation granted to the MTG Board of Directors to resolve on fresh issuance of class B shares by the Annual Meeting on May 18, 2021.

The deal is structured to match MTG and PlaySimple’s long-term economic interests and contains an earn-out element (“Earnout”) based on PlaySimple’s future financial success in 2021-2025 and is payable over the same time period. The total earnings are expected to be USD 150 million and will be paid in cash. On a fully diluted basis, the Consideration Shares constitute 5.3 percent of the shares and 5 percent of the votes in MTG. The number of shares and votes would increase by 6,194,343 and 6,194,343 correspondingly if the Consideration Shares were issued to the selling shareholders.

Strategic rationale

This transaction has a lot of benefits for both the companies, mainly :

• This will provide PlaySimple with innovative flexibility as well as new chances from the GamingCo.
• PlaySimple is also planning on four additional new games, two of which will be card games which is an introduction to a new genre.
• This acquisition will allow MTG to create a diverse gaming vertical with new gaming genres.
• Another advantage for MTG is that PlaySimple’s large user base will attract more female players to MTG’s platform.
• When it comes to Indian startups, the purchase certainly becomes one of the greatest exits. PlaySimple has received little more than $4.5 million since its start in 2014, with the most recent $4 million Series A round closing in November 2016 with participation from Elevation Capital and Chiratae Ventures.
• MTG will benefit from the purchase as it expands and strengthens its position in the casual gaming industry. However, this is a new word game specialty for the firm, which fits in with MTG’s aggressive inorganic development strategy, which is centred on acquisition across multiple genres and countries.

The main lesson from the PlaySimple gaming production company is that they employ a data-driven operational strategy that allows them to produce various games, which are especially successful with a rising worldwide audience of female gamers. MTG’s purchase of PlaySimple is a significant step in diversifying the gaming sector with top-tier enterprises, which will create a more solid business for the Swedish corporation.

Previous acquisitions by MTG

• MTG bought Ninja Kiwi, a New Zealand-based mobile tower defence game developer, for $189 million in March 2021.
• In December 2020, the firm paid up to $275 million for the acquisition of Hutch, a mobile racing games developer located in England.
• Kongregate, a digital gaming site based in the United States, was purchased for $55 million in July 2017.
• InnoGames, a web and mobile games company located in Germany, was bought for $90 million in May 2017.

Conclusion

MTG said the acquisition will help build a diversified gaming vertical with high-quality gaming companies. This acquisition has a lot of potentials and is a great way to pool the resources of both the companies for more revenue and better services. PlaySimple will also strengthen MTG’s position amongst the female gaming audience while also enabling access to the strategically important talent pool in India. One important feature of this acquisition is that the cash exit allowed the stakeholders to make a killing, unlike the usual case where investors get the most of it.

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