Tencent's Winning M&A Strategy - Aggressive, Selective and Precise
Anjal Agrawal
M&A and Strategy at Virtusa || Ex-IB at Nomura (PPO) || IIM Shillong (17-19) || CA || Yes Bank FutureReady Scholar || Ex-JPM || Ex-Baker Tilly DHC || #ProudSINKWAD
Tencent is ramping up overseas investment in gaming assets, seeking to diversify away from the domestic market. It emerges as a powerhouse, leading the acquisitions race among all gaming peers with a staggering 40 strategic moves. Tencent’s acquisition spree spans the globe, from Riot Games in 2011 to the recent addition of Roblox. The Chinese giant’s “silent” investments in diverse studios, including Epic Games and Supercell, showcase a nuanced approach to global expansion. Tencent isn’t just acquiring; it’s strategically positioning itself as a global force in gaming.
The group has a profitable portfolio of smash-hit games in the mainland, including legacy titles such as Honor of Kings, Peacekeeper Elite, League of Legends, and the recently rolled out of self-developed team-based shooting game – Valorant. The tech group will receive another boost after its Dungeon & Fighter Mobile game releases in May after seven years of obtaining government approval for a release before its approval was revoked.
Tencent does not make public the size of all its overseas investments and has previously asked venture capital partners to leave its name off press releases that start-ups publish to tout new funding rounds.
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Big Domestic Appetite
While Tencent has been building up its portfolio of overseas gaming studios for several years, before 2020, Tencent’s gaming investments used to be heavily slanted towards Chinese companies. Tencent’s hunt for overseas gaming studios is driven in part by concern with the internal pipeline of games in development. Tencent was also very active in diversifying its revenues from gaming business to other internet businesses with inorganic opportunities in China.
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Smashing Overseas Acquisitions
Several of Tencent’s overseas studio games have proven a smash hit in the mainland, including League of Legends, developed by LA-based developer Riot Games. With Chinese regulators wary of Tencent’s large domestic market share, it has no alternative but to go overseas. With the US shutting its doors to Chinese companies, Europe is the only place to go. And Tencent is exactly aiming for that!
Tencent has a rich history of making acquisitions to diversify its dependency on domestic business –
Though Tencent faces a new deep-pocketed competitor in snapping up gaming assets. Through its Public Investment Fund, the Saudi Arabian government is investing $38bn to develop and acquire hit games as part of a broader push to become less dependent on oil sales. PIF’s gaming fund Savvy Games acquired the US game developer Scopely for $4.9bn, after purchasing esports platform Vindex and buying a stake in the esports agency VSPO.
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Tencent’s M&A Strategy? “Gotta buy ‘em all” or “Aggressive, Selective, and Precise”
Tencent generated a whopping $175bn free cash flow in 2023. Given Tencent’s aggressive M&A activity over the past decade – it has accumulated billions of investment assets listed on its balance sheet – this attitude does contain an element of truth.
Tencent has gone after a selective strategy – while it does have the capacity to buy most of its competitors with its sheer mammoth pile of cash. How does Tencent operate its selective strategy?
It is “Aggressive, Selective and Precise.” Tencent’s modus operandi appears to be to invest sizeable amounts to gain a substantial but not majority shareholding in companies and then wait to see what happens. They have practised this strategy for most of its investments over the past decade –
It has also enabled game-changing pivots with its companies in the past. One of Tencent’s historical acquisitions – US developer Hammer & Chisel was acquired when it was working on the mobile MOBA game Fates Forever, which wasn’t a success. Hammer & Chisel then ditched game development, instead coming up with its discord voice and text chat PC/Mac/mobile app, which is now used by 25mn gamers.
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This concludes the fourth and final case study in the series “Gaming Consolidations – Forming the Perfect Tetrix.” Tencent looks for Western game companies that already have some level of success, invests, and then trusts in these companies’ ability to succeed. Despite the tailwinds in its domestic business, there remains concern that Chinese regulators are sensitive to Tencent further solidifying its dominant position, leading executives to scour the world for gaming assets to diversify away from China.
The series covered some of the major Gaming companies and their M&A strategies. In this series, we learnt about the dominance of PlayStation, Xbox, Nintendo, and Tencent in the Gaming world. The dominance of these players transcends mere statistics; it encompasses the stories told, the worlds explored, and the profound impact on gaming culture. We also learnt about their individual M&A strategies, the biggest gaming M&As completed and expansion across gaming devices and geographies.
I hope this was a wonderful learning experience for you as it was for me. Until next time, thank you for your time. Please post your feedback and comments.
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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –
1.????? Mergermarket