Analyst: AI-focused M&A deals are "weakening" the games investment landscape

According to S&P Global Market Intelligence analyst Neil Barbour, the investment landscape for the gaming industry is becoming increasingly "weakened" due to a greater focus on AI-focused M&A deals. In the second quarter of 2023, only 23 M&A transactions occurred, amounting to a total gross transaction value of $1.15 billion. These deals predominantly revolved around AI, live services, mobile platforms, and play-to-earn models, with Shengsong Investment investing $596.4 million in Wemade and DoubleUGames acquiring a 31% stake in social casino operator DoubleDown Interactive.

Barbour notes that the number of M&A transactions remained steady in value compared to the previous quarter but experienced a significant decline of 85% from the first quarter of 2023. This decline can be attributed to a market that is at a low point, where the absence of even a single deal, such as a $100 million transaction, can have a considerable impact on the overall market.

In private financing, there were 36 funding rounds totaling $519.7 million in Q2, with a 89.1% year-over-year increase in total funding. However, the number of deals dropped by 29.4%. The largest Q2 funding round was Veroplay's $215.6 million investment, which was used to acquire play-to-earn platform JustPlay.

Barbour emphasizes that while investor and acquirer appetite has not disappeared, it has become more selective, which is not advantageous for creative talent entering the market at this time. He also highlights the difficulties faced by traditional PC and console development teams seeking independent financing or acquisition due to the current layoff and divestiture cycle.

This is primarily caused by the pressure on game creation economics, with low revenue growth opportunities, compressed margins, high development budgets, increasing user acquisition costs, and rising hardware prices.