Neal Young, president of upstart video game developer, gets out bed these days, he’s got a virtual world smile on his face. After all, the former Electronic Arts executive just sold his newbie iPhone development company to Japanese social gaming publisher DeNa Co., Ltd. for an earth shattering, body-slamming $403 million dollars. While questionable, big-dollar acquisitions are nothing new in the video game industry – few can forget Microsoft’s acquisition of Banjo-Kazooie developer Rare for $375 million – Young’s coup d'état is that ngmoco is barely two years. According to my iPhone calculator app, I figure Neal and is fun-n-games cadre earned a whopping half a million dollars a day, just for breathing, just for being alive.
Am I jealous? You bet. At the same time, hats off to Neal and crew because whoever wrangled that deal deserves every penny of their fee. But before the good folks at ngmoco (and they are admittedly an exceptionally talented lot) think that envy has blinded me to what they consider a reasonable, well-valued deal, I thought I’d look at a few tried-and-true acquisition metrics to see where I may have miscalculated.
Over the past two decades, headcount has functioned as a kind of de-facto, bottom-level threshold in valuing video game development companies. I know what the pundits are thinking: ngmoco isn’t a game developer. They’re a publisher, and publishers are valued differently. They’re right — sort of. ngmoco is both. They have developed and published a few dozen games for the iPhone and brought in an unimpressive $3 million in revenue last year (up from $400K the year before). In two years, they’ve gotten fifty million people to download their games, which is about how many people play Zynga’s Mafia Wars in a month. So…they’re a hybrid. Kinda like a Toyota Prius, only with the price tag of a Ferrari.
So applying headcount as the valuation tool, the acquirer asks, hypothetically, what is essentially a buy-or-make decision: would it cost me less to buy a company because of the talent and momentum already in place, or should I hire similarly talented individuals and start my own enterprise? Admittedly, the headcount metric is grossly insufficient. It doesn’t take into account goodwill, profit-earning capability, or the cost of entry into the market, but it is still a good place to start when thinking about an acquisition. So let’s look at a few benchmarks based on this approach:
In 2002 the fiery hot developer Rainbow Studios (creator of Motocross Madness, Splashdown, and other hit games) was acquired by THQ for $44.6 million dollars. Rainbow had 120 employees at the time, so the headcount cost was approximately $371,000 per employee. In other words, THQ paid nearly four times the cost of an average, fully burdened employee’s salary to acquire the team, tech, and reputation. Not a bad deal, when you look at it from that perspective.
In 2007, Warner paid $210 million over five years for Lego Star Wars developer Traveller’s Tales. TT had 200 employees, so the cost per employee was slightly over one million dollars each. That’s a lot more than what THQ paid for Rainbow, but it was five years later, and the price included TT’s market-proven Lego license, which was probably worth half the cost.
So, how does that stack up to ngmoco? In March of 2009, ngmoco had approximately twenty-six employees. I honestly don’t know how many they have now, a year and a half later, but let’s give them the benefit of the doubt and say they had a staff of sixty. Based on that assumption, their headcount value is a gargantuan $6.7 million per employee. That’s more than six times the headcount price Warner paid for Traveller’s Tales, and that’s without a cool license. It’s around twenty times the price per employee paid by THQ for Rainbow and without nearly the same level of technology. It means that the replacement cost for every man, woman, and child punching the ngmoco clock is over six million bucks each. That’s better than my life-insurance policy by a factor of, well, six.
“Ah,” you say. “You forgot to consider ngmoco’s value as a publisher.”
In December 2005, Electronic Arts purchased the widely known mobile gaming company Jamdat for $680 million. Jamdat is similar to ngmoco in that at the time of acquisition, both leaders in what was perceived to be an emerging gaming market, headed by a veteran game executive, and backed by heavyweight venture capitalists. Jamdat, which was founded in 2000 by former Activision executive Mitch Lasky, was five years old when it was acquired. It had published countless mobile games and acquired several smaller companies. The skies of the mobile gaming market were just as blue and full of white, fluffy clouds as the social gaming market is today. With roughly 350 employees, word on the street was that EA paid stupid money for Jamdat, even though Jamdat’s stockholders thought they should have gotten even more. Regardless, EA paid a smidgen less than $2 million per employee, which according to Piper Jaffray analyst Anthony Gikas was $200 million too much.
So, how does that stack up to ngmoco? Taking into account ngmoco’s sixty employees (or there about), their value is still over three times that of Jamdat and probably more. Is it really that much more valuable?
At this point, I have no doubt ruffled the feathers of some very smart finance fowl roosting in the Silicon Valley. They’re probably standing over an Evian filled water cooler, puffing their chests, and telling their friends that they’d never use something as simplistic as headcount as the basis for a sophisticated valuation, especially now that social networking has taken hold of the video game industry. They communicate with each other in an argot filled world of uniques and retention and eyeballs, and point to a more reasoned approach, such as the one described in Techcrunch, which looks at the cost of acquiring a game player. Or, when desperate, they’ll use slide-rules and trigonometry, algebra and differential equations, quantum theory and Einstein’s Theory of Relativity to show that their acquisition was worth every penny of the purchase price. No doubt they’re right. I’m just a simple guy trying to figure out why I didn’t beg Neal Young for a job a couple of years ago.
Nevertheless, hoping to appear reasonable, over the next several blogs I’ll look at a few other approaches used to value video game companies. Then I’ll apply them to ngmoco and see what happens. In the meantime, I’m going to rest here in the uncomplicated world of headcount valuations because I’m exhausted and because it’s starting to smell a lot like the dot-com boom around here. When I’ve regained my energy, I think I’ll dust off my e-Toys stock certificates and see what they’re worth today.
Dan Rogers | Copyright 2010
2 Gamespot, December 14, 2005