M&A Alert - July 28, 2010
Disney Interactive Media Acquires Playdom
Transaction Overview
On July 27 2010, Disney Interactive Media acquires Playdom for up to $763.2mm including a $200mm earn-out.
Target Description
Playdom develops online social games and is the largest social game developer on MySpace and is third largest developer on Facebook. Popular games include Social City, Mobsters, Poker Palace, Tiki Resorts and Sorority Life. Playdom has 38 million monthly active users (“MAU”). To date, more than 130 mm Playdom games have been installed on Facebook, MySpace and Hi5. Since inception in 2008, Mountain View-based Playdom has raised $76mm in total funding. It has recently closed its second round financing of $33mm at a $336mm post-money valuation in June 2010. New investors were Bessemer Venture Partners (Byron Deeter, David Cowan, Ethan Kurzweil), New World Ventures and Disney’s SteamBoat Ventures. The first round of financing was $43mm in November 2009, led by New Enterprise Associates (Scott Sandell and Sujay Jaswa), followed by Lightspeed Venture Partners (Jeremy Liew) and Norwest Venture Partners (Timothy Chang). After hiring John Pleasants, Electronic Arts’ former COO last year, the Company grew from 60 employees to 600 employees and made numerous social gaming acquisitions this year as an effort to build game developer talent. Playdom’s acquisitions include Metaplace (July 2010), Hive7.com (June 2010), Acclaim Games (May 2010), Mersom (April 2010), Three Melons (March 2010), Offbeat Creation (March 2010), and Trippet and Green Path (November 2009). Upon acquisition, John Pleasants will become the Executive Vice President of Disney Interactive Media Group, reporting to Steve Wadsworth, President of Disney Interactive Media Group.
Buyer Description
Disney Interactive Media develops and publishes interactive entertainment content including multi-platform games, movies, music and video for internet, mobile and video-game devices. Disney Interactive has made a number of game studio acquisitions, which has helped Disney create game titles ranging from Toy Story 3 to Split/Second. Earlier this month, Disney Interactive acquired Tapulous, the maker of iPhone music games, for an estimated $22mm-$50mm. Previous game acquisitions include Wideload Games in September 2009, TruGames Interactive in September 2008 and Gamestar in April 2008. Key executive sponsors of this transaction include Robert A. Iger, President and CEO of the Walt Disney Company and the business unit leader, Steve Wadsworth, President of Disney Interactive Media Group.
Transaction Parameters
The purchase price was $563.2mm plus a $200mm performance-based earn-out. Approximately 90% of Playdom’s revenues are derived from the sale of virtual goods (of which 75% are from direct sales of virtual goods, and 15% are from advertising-offer-based virtual goods) and the remaining 10% is derived from in-game advertisements.
Acquisition Price: $563.2mm-$763.2mm
2009 Revenue Multiple1 11.3x-15.3x
Invested Capital Multiple 7.4x-10.0x
Acquisition Price Per User2 $14.82-$20.08
Listed below is comparative valuation context for other social gaming companies and social networking sites.
Acquisition Price / # of Users – Social Gaming
Electronic Arts/Playfish (Nov ‘09)3 $5.00-$6.67
Acquisition Price / # of Users – Social Networking
NewsCorp/MySpace (July ’05)4 $28.00
Private Market Valuation / # of Users
Facebook Secondary Market (Jun’10)5 $50.00
Zynga Secondary Market (Apr ‘10)6 $16.88
Note:
1) Based on estimated 2009 revenue of $50mm
2) Based on 38mm monthly active users (“MAUs”) as disclosed by Playdom
3) Based on $300mm-$400mm purchase price and 60mm MAUs
4) Based on $580mm purchase price and 20mm unique users.
5) Based on $25b valuation and 500mm MAUs
6) Based on $4b valuation and 237mm MAUs
Strategic Rationale
The acquisition of Playdom continues to demonstrate Disney’s evolving strategy around games and their continued leverage of new distribution platforms for their content. Until fairly recently, Disney has been content with an out-licensing strategy, allowing others to develop and publish PC and console games based on Disney characters and brands. Playdom is the most notable acquisition in a series of acquisitions that really started with the acquisition of Club Penguin in August 2007. Playdom brings Disney a top brand, 38mm active players, top notch social game development talent, experience with the virtual goods revenue model and social networking credibility. There are clearly numerous opportunities for Disney to build upon Playdom’s success with its world-recognized characters and content.
Architect Partners’ Observations
We put this transaction into the blockbuster category: dramatic value creation in a very short period of time. So what makes Playdom and social gaming so attractive? Jeremy Liew, (Managing Director at Lightspeed Venture Partners) has a compelling post on this topic. A few additional observations:
1) Playdom was one of a few social gaming companies who were able to quickly build users and revenues by leveraging the immense user base of social networking sites such as Facebook and MySpace. This opportunity has since been constrained as Facebook (and others) implemented spam-and-privacy-related restrictions. Recently, Facebook restricted notifications of users’ latest game score or game activities, and prohibited the sending of viral invitations, which impacts the ability of users to discover, try or play new games.
2) Costs of game development and distribution have to-date been extremely low. It is estimated that the average social game costs $100K-$200K versus $30mm-$50mm for a top PC or game platform title.
3) High-margin monetization: Playdom and other social game vendors drive revenue largely via sale of virtual goods. Virtual goods are non-physical objects that are purchased for use in online games, such as digital clothing or weapons for avatars. The gross margin is essentially infinite.
Resources
Secondary Valuation Research Report by Second Research