Tencent focuses on majority transactions and foreign gaming assets as potential growth sources.

Tencent As the digital behemoth seeks global expansion to counteract slowing growth at home in China, According to insiders with firsthand knowledge of the issue, Tencent is changing its M&A strategy to concentrate more on purchasing majority stakes in foreign gaming companies.

Highlights

  • Tencent focuses on majority transactions and foreign gaming assets as potential growth sources.
  • GOAL OF BIGGER IMPLICATIONS
  • RELIGIOUS HUB

Since many years ago, Tencent Holding Ltd. has mainly invested in hundreds of emerging companies in the onshore market. It has typically made passive financial investments and bought minority stakes.

However, according to the four people with direct knowledge of the situation who spoke to Reuters, it is now actively pursuing majority or even controlling holdings in foreign targets, particularly in European gaming assets.

The shift takes place as the top gaming firm in the world by revenue plans to expand internationally, which, according to the sources, calls for a strong portfolio of top-grossing games.

Following two years of limitations and unpredictability that damaged their domestic sales and precipitated a dramatic decrease in their stock prices, Tencent’s new strategy exemplifies how China’s internet giants are attempting to emerge from the regulatory shadows.

Apart from the core gaming sector, Tencent is also looking to snap up global assets, particularly in Europe, related to the so-called metaverse, said one of the sources and another source with direct knowledge of the matter.

Since the material was confidential, the people declined to give their names.

Long before any new rules in China, according to Tencent, the corporation had been investing abroad.The business stated that it searches out “innovative firms with exceptional management teams” and gives them room to expand independently without going into greater detail.

According to three people, Tencent is pursuing more significant investments in gaming companies while internet behemoths like Microsoft, Sony, and Amazon are buying up gaming assets and related intellectual property.

James Mitchell, Tencent’s chief strategy officer, stated on a conference call following its August earnings that the business would continue aggressively purchasing new gaming companies abroad.

Regarding the video game industry, our objective is to “concentrate on growing our capabilities, particularly in the foreign market,” he stated. We’ll keep doing a great job purchasing other game studios outside China.

GOAL OF BIGGER IMPLICATIONS

In stark contrast to its considerably slower dealmaking pace at home as the regulatory clampdowns escalated and the divestiture of several local portfolio businesses, Tencent’s expanding concentration on international assets and markets.
According to Refinitiv statistics, between 2015 and 2020, the owner of China’s most popular messaging app WeChat made 150 domestic investments totaling $75 billion, as opposed to 102 agreements worth $33 billion in foreign markets.

As a result of laws that restrict playing time and a shortage of game approvals in China, Tencent revealed its first-ever quarterly top-line decline in August. Online gaming revenue fell 1% globally and domestically.
In the previous two years, the value of its Hong Kong-listed shares has decreased by around 60%.
In light of this, data from Refinitiv reveal that Tencent has barely made any investments in China this year compared to 27 acquisitions totaling $3 billion elsewhere. According to people who spoke to Reuters, it has been shrinking its portfolio in part to appease regulators and in part to earn some sizable profits.

In an early September research, Citi analysts stated, “We anticipate Tencent will continue to make reasonable investments to acquire top-notch gaming talent and content as well as to strengthen collaborations with leading studios globally to increase its investments and presence in abroad markets.

The four individuals claimed that Tencent’s pursuit of more enormous stakes in its current gaming portfolio or new targets would offer the company a more significant influence in such companies’ businesses and also benefit it in securing the intellectual property rights of well-known titles.

Additionally, the four individuals claimed that Tencent is forced to work toward acquiring control of foreign game businesses and their IPs due to Beijing’s stringent limitations on domestic game approvals and the ongoing suspension of licenses for games based on foreign IPs.

Tencent boosted its ownership of Ubisoft in a deal in September, becoming the sole shareholder with an 11% holding that can grow to 17% in the leading French video game maker.

RELIGIOUS HUB

The affluent Tencent recently acquired Sybo Games, based in Copenhagen and the producer of the well-known mobile game Subway Surfer, and this transaction with Ubisoft comes shortly after. Additionally, Tencent bought a 16.25% stake in FromSoftware, the maker of the “Elden Ring” video game, in August.
Tencent said last year that it will buy British videogame maker Sumo in a $1.3 billion deal, making it one of the company’s most significant international acquisitions since the government crackdown in late 2020.

Tencent has mostly completed minority transactions in Europe, except for its $8.6 billion acquisition of the majority of “Clash of Clans” mobile game developer Supercell in 2016. Tencent acquired 9% of Frontier Developments, a British gaming business, in one such transaction.
Two insiders also claim that Tencent wants to expand its investments and forays into Southeast Asia because it thinks the 650 million-person region has the potential to follow in the footsteps of China’s internet boom.

Singapore, which acts as a regional hub for Southeast Asia, is home to a worldwide game publishing business run by China’s largest social network corporation.

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