two & a half gamers honest interviews #2 - Elena Egorova (Can you even M&A bro?)

[Music] welcome everyone uh this is no gaming podcast 2 and a half Gamers uh we're doing the second installment of our honest interviews segment after having yoa came on the show a few weeks ago where him and Ma discussed everything related to VC Investments we wanted to follow up that interview uh by discussing m&a which is pretty much the other end of the spectrum so we've all been getting used to seeing these massive headlines with equally massive numbers of gaming gaming companies being bought out and service companies being bought out uh but we feel that no one's really actually discussed how m&a in our industry actually works so we wanted to do a special episode just focusing on m&a in the gaming space uh which is why we're super excited for uh Our Guest

this week which is Elena egorova thank you so much for coming on how's your week been oh thanks for having me oh wonderful as always cheers good cool so for our listeners who actually don't know you haven't seen you around in probably the million of conferences you've been to in the last 10 years do you mind just uh yeah doing a quick elevator pitch of yourself a little bit about your career Mobile gaming and what you've been been up toing in this industry sure well you said 10 years and this is precisely my time in gaming industry I started in a very small game development studio called Dynamic pixels which uh you guys may know by the game called hello neighbor that is their Flagship title and the studio itself was acquired last year if my memory doesn't Fail Me by publish a called time build and this is again like a perfect example of how m& gaming is is getting more and more traction uh currently on the

Global head of corporate development in a company called Flex mobile uh I'm trying to build a family of the companies that are catering to to the major Publishers uh aiming to have like this One-Stop shop and one hand solution for everything that is connected to mobile game oriented Services uh we have just completed the acquisition of uh company called audien Le based in Germany as you Felix and uh also an investment in light media earlier in 2021 um both companies are in this super hot influenc marketing space getting more and more traction due to all those restrictions coming together with uh you know idfa depreciation third party cookie depreciation and everything that is basically not allowing us to use tracking as before and uh yeah so currently I'm in game Services space uh in my former role I was an m&a director in the company called eg7 a Swedish

public holding uh we have completed five transactions over two years uh over like half a billion dollars oh my God that sounds cool I don't think I've ever sent that much money in cash anyways so prior to that uh I was head of international relations in m and there I was holding everything from user acquisition uh monetization publishing and Investments so yeah that is me uh 10 years I guess my most memorable transaction from last year is company called Daybreak everybody knows them for ever quests and lots of those MMO RPGs that are basically the founding zones of the Gen and uh most recent one that I mentioned is the audience s reflection so M m&a so mergence and acquisition is that something you like fall into accidentally because you know you were doing you know M Ru and kind of stuff

and like is it just you kind of accidentally fall into or do you like how do you get into it fun fact I actually have an education as a nuclear physicist so I was very far from Investments and merges and Acquisitions in finance uh however for eight years no seven years when uh when I started doing the first transactions I was uh all over the place in in the gaming world because I was working for a game studio for a service provider for for a number of service providers from advertising networks to uh agencies and uh I think the key factor is the knowledge of the market the key factor is the understanding of what exactly is driving revenues and profits and how to succeed and how to create those Evergreen titles that are going to be you know your Dair cows for for many many years ahead and uh I with all that knowledge I just basically rode the wave and when I got

an offer from ej7 I didn't hesitate because knowing the gaming company through and through I think that was that was my perfect way to contribute to the deal flow so yeah it just happened so in summary you do not need an education in nuclear physics to um get into m&a right actually it helps a lot it's a nice ice breaker because then people just kind of feel a little intimidated and it helps a lot in the discussions when there a CEO and he's like oh okay you're probably smarter than me sorry yeah I can't even spell nuclear physics probably without spell check so yeah intimidating indeed I don't believe you I don't believe you so just for the people that don't know uh what does flexi and mobile do and why is m&a important like an important part of their strategy flexion mobile was originally helping developers to go into the alternative Android stores such as Huawei app gallery Samsung and Amazon

and xiaomi because you know more and more restrictions in app store and Google Play make uh developers explore what is uh what is going on on different stores which are not as huge and popular but they highly driven by the devices that uh om are selling and they are highly driven by uh the user's desire and the players desire to kind of cut their own costs for for the games and also it's convenience because they're all over the place and have a choice is a primary driver for any market right for any consumer and mobile games players are not not an exception flection is working with h games and we have this unique patented technology we call rapper that takes the game build and just packs it for every single store that is uh our partner um and the outcome is 10 to 15% of additional revenu from Google Play and the thing is we in we're thinking of how we can

possibly diversify our offers to our clients how we can serve them better how we can serve them in more different aspects and this is how buy and build came handy because if you don't want to grow the expertise through pain and sweat and tears and blood over years uh it's a simple solution you can buy a functioning team and just integrate it within your company because for us you can see that the clear trend is that studios are being acquired and those Mega Publishers are being informed uh such as electronic carts and such as embracers and steel fronts and Disneys and take TOS all over the world so what do they need they don't need to work with dozens of different agencies and platforms and everything around the world they want to have a One-Stop shop and one unified centralized solution to do their games marketing and this is is what we're

basically trying to write on because we want to provide I mean our Target clients are the top grossing games or I think there's around 700 of them and top grossing game Publishers all over the world and what we need to do is to understand their needs what do they need most they need comprehensive games marketing they need some comprehensive data science user acquisition monetization so everything along these lines is something in our Target list and this this is why we're on this SP Track cool good answer yeah almost scripted I like it perfect uh so no idea what you're talking about so actually let's uh let's get into like the meat uh meat of this kind of a podcast what we actually wanted to have you on so we wanted to talk about uh mergers and acquisition so I think for me like it's sounds super sexy from the outside but I have no idea what it actually means like Could you actually walk us through the

whole m&a process like what I first want to know is like how do you decide even like what companies to look for I mean imagining you sitting in like mahogany something really nice boardroom and then you decide where you go after I have no idea but could you walk us through like that where you decide who to go after how you find the type of companies that you're looking for and then how do you approach companies and then how do you actually yeah pay them the cash to make them yours sure well uh to find the to find the need you first need to identify what is uh what is going on with the market so you need a certain level of fluency of what's been going on so we need to read tons of gaming media and tons of uh services and marketing and all kind of stuff I mean my day starts with PC Gamer and Pocket Gamer and EUR gamer and all kind of Gamers and uh all kind of media that uh there is to to understand what's been going on because sometimes changes happened just

overnight I mean for Ida depreciation we've been knowing for for I think a year and a half at least maybe for a couple of years but some things are completely like out of the blue like do you remember how um Electronic Arts stormed into the transaction That was supposed to happen between take two and gold Masters and how they basically snatched them in this dramatic moments like in you know in this romantic comedies when the priest dur in a bedding C money says is there anybody who object this marage and somebody's like I do and this is what Electronic Arts did so yeah sometimes you wake up and you see like okay they're bought fine cool so somebody somebody spent 15 pounds on Amazon and somebody spent uh half a billion on on a gaming transaction so yeah gaming media and understanding what's what's going on and what's hot um reflection specific I think we talk a lot with developers we need to understand what what is the missing missing ring in the chain of uh game services and we will look how to

better serve them and how to better satisfy their needs um sometimes Targets target companies come from the inbounds sometimes we haven't even thought about this particular sort of company and then the bankers the IND specific Bankers they reach out and they bring up somebody or a client of theirs so which for which they're looking either for a new home or just looking to sell and um yeah for for Studios uh I say that there's a lot of there a lot of uh additional sources such as different Indie competitions like India Cup who are based in KF we're actually big friends with them uh they do have their own peck of the promising India studiio that they're working with uh there are also this huge uh service providers Giants such as epic and epic for example they have they have their own showcases like online showcases where they demonstrate the games from the team they

know and trust the most and uh this is also a great way to pick the best of their home leader so this is a research do you have any questions about that yeah yeah tons yeah so so basically if I'm crystallizing down what you say you basically you're sitting on this like yeah pile of dry powder of like m&a resources that you can put into something you know exactly what your company needs and then pretty much you just yeah stay plugged in and you're like oh that looks nice we should look into that is that precisely okay cool right okay so what happens then like Okay so let's see you know you open up pocker gamer and you hear a new company you're like boom like that's perfect for us what happens then well then uh you approach the Senior Management thec levels so usually it's a CEO or coo because they are the decision makers it's it's going to be strange to approach a BDM or something else like this so you do the initial contact you

describe the opportunity you say hey this is us this is what we're looking for you guys in perfect how about we have a conversation and over the course of the next few days um the target company I mean after signing the NDA obviously the target company just you know shares some details about themselves uh how their business has been historically developing um their future plans what how they plan to grow which areas of the investment they they see and what areas for growth they see and opposite the financials I mean of course this is the most important part the historical financials and their projections for the coming few years uh all these all this data we use to evaluate the company which well you call the evaluation obviously and uh that helps us Define the multiple for for the company I think I think well actually let's let's let's get into the multiples later uh yeah that

separate it's a huge topic yeah so diligence I guess that's that's what you're describing there right you're doing your diligence this is the initial diligence because this is not yet a formal process because the findings uh that were initially shared we will use for to form uh an indicative offer to just outline the basic deal terms and then a letter of intent so the letter of intent So when you say basic deal terms what does that actually mean so like then doing the pre- diligence or what do you call it like first diligence it's okay valuation okay cool just to understand how much we actually want to take out of our wallet to to pay for the company is is this like pre- diligence or like like that valuation is that where you usually find the dirt you know like or if any like red flags or is that like at a later stage uhuh the red flags is something that is going uh that is going on further after after the formal process starts because when the formal process starts it starts with the letter of intent when it's signed the company's bed by the exclusivity period the

exclusivity period means that they cannot Court any other potential buyers they cannot disclose any information as potential buyers and this is just like us and them being in this little room interrogating each other to understand if this is a match so the due diligence comprises of four uh areas commercial and operational legal and financial which also includes tax and the first two are usually conducted by the internal team and this is again where all this game in market knowledge kicks in to understand if if everything they claim is true and if there's TR potential in the areas they claim to have the potential is that is that you doing that or like do you bring is that when you bring in the suits and kind of the lawyers as well to help you out or is it as an m&a director I'm actually leading the commercial and operational du diligence so everything commercial is is in my area of responsibility while legal tax and financial is definitely something the Consultants uh do but

Consultants only get involved after the initial commercial and operational due diligence completion because then we create uh a report we call it a red flag report for the board uh basically recommending shall we proceed with the transaction or not because most of the red flags are usually found in the commercial and operational part because for example the compan is claiming that uh they have like this fence attack but in the end it's just basically a dozen of dudes just to do in manual work and that's it or the company has if this is a studio for example they have like this huge project which is like $50 million for development and you look at it and you're like there's no single chance for you to have more than 5.5 on this uh how do you call this service what of this I forgot where all the where all the um evaluation posted from the users I totally forgot about that but we can just leave it out anyways uh yeah some times you discover some red flx uh in my

is in the norm or is it like yeah it is a norm In My Memory I've I've been working on 10 transactions and completed seven of them so there is a certain percentage like let's say 30% of transaction can actually with in the very in the very development but that is perfectly fine because there's also a chance that the target company understand that this is not a great match and yeah we'll we'll touch it uh separately bit later but yeah when the commercial and operational diligence is done uh the Consultants kick in uh which is always better when the company also has a banker that is representing them and help them navigating through those financial and um legal stuff I think this is the most complicated part because they need to analyze all their pnls all their client contracts all their taxes for I don't know like five years three years of of operation so this is a huge thing so afterwards when the the Consultants have submitted their

respective um reports we compile a giant report uh concluding if we should proceed with a transaction or not and after that the board the board of directions of our company is making a decision do they actually agree that we shall proceed do they actually agree that because it's not a question of a few thousand bus right it's millions and millions and you have seen the huge numbers and if this is not enough to convince your parents that gaming business is actual business and not just like fun in games I don't know what is enough so hi Mom so yeah but again after after the board has uh has vouched that yes we're going on with the transaction uh the sale purchase agreement is signed which is a giant document that uh has to be read through whe authorly because it basically comprises of all the terms and conditions of all the obligations and regulations that both companies will

have to comply to and um yeah we shake hands we open the bottle of champagne and this is where the big work kcks in the integration because why we're buying the company we want to do something with it right I mean obviously we want it to to retain their operational Independence but we also want to execute the synergies that we've been initially looking for so that's the process in the nutsh show I mean obviously there's huge amount of detail but overall it's simple timeline yeah so so this whole process you make it sound so elegant and easy how long is this process usually cuz I know that people I know who work in m&a like you there are certain periods of the Year where you know you don't hear from you for like a couple of months because you're working on a deal like how long does this usually take from you know scouting to popping the champagne I would say four month is a minimum six months is a standard but there always variation because each deal is different each each company has its

own track record of complications and advantages and disadvantages and all kinds of stuff so it really depends I would say that less than four months is unrealistic but sometimes it's really also depends on how much you actually want the company if you want to snap a deal just bury them in cash and that's it otherwise you have to actually put some work into it okay makes sense and so this is when you're working the crazy hours for that four to six months time period right when we were completing Daybreak I think I got four hours of sleep in December that was fun no it wasn't okay so for us like Layman like why do you need to work those hours like it's a very basic question but like I you see dur in the m&a deal you have to work with a number of stakeholders from your own company and the target company sometimes it's a matter of time zones I'm based in London for example we can work with a company in China which will be like father in time and we can work with a company in America which is

just waking up while we're having our our dinners and it's also you know multiple stakeholders and consultants and processes you have to keep an eye on because when the commercial operation part is done it's not like I'm just sitting there with my arms folded because I need to see what Financial teams have have found I need to see what legal teams have found every week and some sometimes like multiple times a week we have a catch up with the bankers and with the legal teams to see how things are going if there is anything because the constant communication and constant cooperation within uh all the stakeholders is is the key factor for the Amal success because only the collective work makes this happen and you can do a lot on your own but you can do everything so having our Chief Financial Officer constantly on it having our CEO own it our chief operational officer on it this is super important for everything so you have to be available able for all sides you have

to do your homework to come prepared for the management interviews and uh to read through the documents the SBA is usually like hundreds of pages so it's a lot of work but it's super rewarding if it's done right cool I think that it serves as a beautiful segue to discuss probably the sexiest topic about m&a and that's valuations uh these big eye popping numbers that's what we want to talk about so let's talk valuations uh so we've seen a lot of eye watering numbers uh in the past two years can you just give an overview how companies are priced during the offer stage well that is the toughest one I guess and yeah it's it's very difficult to talk about things that we've recently seen for companies being aord for peanuts and for companies being acquired

for so much that the return on investment is just it's just never going to be seen so you can see lots of lots of very uh extreme valuations and let's start with let's start with a simple let's start with uh the classic normal valuation and the multiple for that is usually chosen it's not like really calculated I mean there's some way of financial modeling and stuff pull it out of thin air like this company is two not exactly not exactly not exactly but anyways uh a certain number of factors are being considered for this uh obviously first is Market average so you look and see how other companies are work you can see lots of reports from uh different Bankers like for example wiy Partners is writing comprehensive reports about state of m&a or all over the world um every quarter I think uh there's alsoa Capital there aring capital all these uh really notable uh

Bankers they do they do keep us updated about what's been going on what are the average multiples for each and sometimes it's weighted weighted means uh they take out the super high valuations and below so that we can see the actual average because when a 50x kicks in obviously it just screws up the entire math of of the median uh valuation but yeah Market average is is the first thing I would look into second thing for for the tech companies and for service companies the scalability is is a huge Factor because agency model for example is very difficult to scale while the automation platforms with creative and user acquisition and everything around that uh have well pretty much infinite infinite potential to scale so you can you can easily extrapolate this for revenues and profits right so that explains why then gaming tend to have a lower multiple than services or software

to service companies then I guess so look service companies are way moreable you can easily see that here is a client pipeline here's how it can be expanded here are the new markets that haven't been targeted yet and Os that you're looking for and we're going to get X on this one and Y on this one and that's it for gaming companies for Studios it's always because I do believe that games are art it's definitely a form of Modern Art and art element is always an element of uncertainty I mean with the premium game you can more or less forecast how many copies are going to be sold while the free toplay game is basically aing Cognito I mean every forecast there is still a forus and it's very difficult to predict how it's going to go and uh well I guess for a studio a really a really key factor for valuation is do they have their own IP because licenses are always a little

tricky because not owning something is always a little tricky like in in the UK they have this beautiful thing called leas hold which means that you buy the house for 900 years and then it's it's back to the crown and although I mean 900 years what going to happen in in that time but you still going to feel that it's yours because it's still like a leas hold and not like a complete sale and same with the licenses because they usually come with conditions conditions are with ability for example with uh the targeted audience how many players have been brought and anything can happen right and although they licenses are also some sort of like a guarantee for the success because people are always going to play Lego games people always going to play Marvel and DC and Order rinks and all kinds of those because those are the Evergreen franchises but having all strong solid IP that is generating profits is always a very big thing for for the success not to say that's about gaming engines

because I think that with the sophistication levels of unity unreal and others that's off the shelf Solutions it's very difficult to compete with those for in terms of game quality so I would say that IP is in terms of the gaming titles so that's it and yeah it's always very much more difficult to evaluate the studio rather than so so what's the Spectrum right now so let's say gaming companies and service companies like what kind of multiple Spectrum are we looking at 2x to 12x for gaming or is it like way more or like what would you sayh well that very much depends because um if the valuation is on profit on ebit ebit I would say that the interest standard is starting from 8 89 if we're talking about the Service Company it really depends on the if it's an automation platform if there some sort of s or is this just a simple

agency uh I mean I don't want to I definitely don't want to uh diminish the agences because uh machines can do a lot for us but they they canot do everything so people and being creative and people being you know uh given their human touch to the thing are also very valuable resource however it's very difficult to scale again which brings us back to the scalability as a key factor for the valuation so so I would say that in average the agency multiple is going to be a little lower than the tech multiple and that is perfectly explicable and uh if the company is wait wait wait wait wait just a blonde question here since I'm blonde uh so basically on deciding if you're going to do when you're buying a company if you're going to do a revenue multiple or instead of a profit multiple is pretty much due to the scalability the future scalability of the company or did I get that completely wrong it depends so usually the profit multiple the Abit

multiple is used uh if the company is profitable and is generating um profits if they have Revenue but they do not yet have profits they're breaking even or they're still like investing heavily it means that we can apply the revenue valuation which is going to be significantly lower it's going to be like 1.5 to three pretty much for for the revenue and uh sometimes even when the company is profitable the revenue valuation is still is still applied because let's say uh in 2021 you had to do a significant investment let's say you hired a new sales te like let's say you got four sales managers and for account managers and this is like huge contribution huge investment but this is like one time false and you understand that in the future they definitely going to bring some return on the investment you making the Personnel if this Service Company it means that your ID die is

going to be lower but the future is going to be higher and sometimes the company the buyer can actually make a step forward to the company and as a Coury offer their revenue valuation for this because they understand that for this particular year ID is low but it's not going to be fair if we just apply the ID multiple sometimes also if this is for example a studio let's say last year they bought a super expensive license from DC all right or let's say they have they have some other significant costs which are onetime costs then you also can apply the revenue valuation or there's also another option which is kind of getting halfway there's such thing that is called adjusted AA so you see that your cash AB is on certain level but only because this one time nature of the investment that was made and this is how and this is why they adjust the EV for example they take the cost of the license and add this to cash head down

and this is the way to adjust it and to kind of meet halfway which is I think the best possible outcome for a transaction Okay cool so that takes us to how you decide on uh kind of the revenue multiples or like the valuation so yeah you decided that you know this company that potentially you want to buy for let's say x amount of money so next thing I want to get into into is how are deals typically structured in Mobile gaming services or mobile gaming in general in m&a cuz usually you don't buy companies or very rare cases do you buy companies in 100% cash am I correct absolutely yes because the thing is uh if you are well if you're acquiring a company first of all you also have to think about your which on and investment and considering the fact how many profits of there you're going to give them back you also kind of have to consider your own interests and you also need to bind the

founders so that they commit because we AFF flection for example we look for founder Le Studios we don't want uh we don't really want to them to exit so we create an incentive structure for them which is an m& and exit uh not always not always I mean sometimes of course the founder is just looking to retire or just you know to to buy a better home for the misses or to go on and create their own business to become a crypto or something but uh for us it's super important to find the founder that is willing to cooperate with us so it's not exactly an exit this is more about leveling the company up and providing a certain number of opportunities again you can do a lot on your own but you can do everything and in terms of that please go ahead yeah so what tools do you then use cash do is there something else or gold cash and stock cash and stock I think would be

enough but I would say that there's two parts of the deal two parts of of the price there's an upfront consideration which the founder gets when they shake the H and the SBA signed and there's also an earnout if the founder is bound to stay so The Upfront consideration is always a combination of cash and stock different proportions it depends cash heavy or stock heavy I mean cash heavy deal allows you to avoid dilution so that the owner of the acquired company not becoming like huge massive shareholder but uh yeah if you increase the number of shares you can save them cash but then it's also like a little risky so you always have to wait a lot of a lot of different factors and yeah stock heavy deal stock heavy offer also means that the target company really believes in the founders vision and they trust them and they understand that there are certain that the founders can lead their company for success and

it also means that you are committed to bringing the whole group into success not your own company and I think for the founder it's the biggest role it's a super major role in the group and it's a very good opportunity for those Founders who have outgrown commitment for just their own company and being ready to contribute their knowledge their expertise and their passions towards the whole group so that's a really interesting Insight so I never thought about it that way so like next time I read about a like m&a activity anything like an aition and it's stock heavy that means that they had faith in the founder and they really trust him and if it's pure crash it would probably say the opposite right it might say a lot of things but including but not limited to so so uh this upfront payment like is it 10% 20% I know you're going to say it depends but generally like where do you want to keep this I'm

assuming it's in your interest to keep that as low as possible and then yeah for the acquir to have as high as possible they want to have it as high as possible correct um well on paper yes but it's also the human business right we intend to work with those people so our goal is to make them happy it's not like we want to pay like the bur minimum and that's it obviously we want to reward them was Justice for the success they have built on their own and obviously will want to Future invest in the company if needed to make them uh make even more and uh I wouldn't say that upfront is a certain percentage of the deal I would say that upfront is a completely separate thing and the earnout which is a second part is also separate in a way that it is tied not to the Past earnings and profits it's pass to it's tied to the future success so everything like like for example an earnout maybe you should explain like earnout and like how it's

usually structured that's probably a better way to go about it absolutely so earnout is basically an incentive to keep the founders engaged and to hit uh the targets that they have if it's a service company for gaming companies it's a little more difficult to kind of create the revenue and profit targets but anyways that's also doable so basically um you apply a multiple on the abitar or on the revenue for the let's say four consecutive years after the transaction so if we completing uh an acquisition right now let's say for 22 23 and 24 they're going to get an additional multiple for hitting their targets sometimes it's a progressive multiple let's say if they if they um make 75 to 150% of their target of their target revenues of profits they get an additional 1X multiple for each profit which means that they're going to get back every profit that they have made like back to the founders back to the

company um it can also be let's say they have done 50% to 75% of their goal so they're almost there but something went wrong I mean everything can happen right you never know what's going to happen next in in in our times when everything is so unpredictable sometimes there can be like a little dip but for that dip let's say we also still want to reward them we want to give them like let's say health a multiple and if they fail to get into half of their projected profits it means that there have been some rather unsatisfactory planning which means that they will not be having any earn outs but hey again each year is usually like uh evaluated separately so if for example in 2023 they're making more they're getting their ear not and that's it so we're trying to be super fair and we're trying to entice them so that all the hard work is always rewarded you say super Fair though right

but it would be kind of in your interest for you guys to set super high targets right and then they reach maybe half of that and then like they don't get 100% of the earn now or 50% no we're very much uh I mean we are a team right now and for us their success is our success and this is how this is how the group is functioning as a whole we are very much interested in them being happy because a happy founder means that they actually actually doing their best and you see uh our biggest resource our biggest uh asset is people and people in business people who are in tech people have build in our project people who are I don't know managing our offices so we really try to be people first and people faced I mean everything is obviously the numbers on the balance sheet but it's also it's also about people having the ownership and doing their best because you can see thousands of researches and articles about how happiness in the workplace and overall

satisfaction with their lives is actually contributing towards uh people's um how you call this people's um contribution at work and their success at work so yeah people fac m&a is something that we are committing to so interesting topic so yeah earn outs and then basically I'm assuming that management has to have some people basically in their team which brings me to a question I've always wanted to ask when you're acquiring a company golden handcuffs I.E like who has to stay for that earnout period how do you decide who gets to wear the holding hand like golden handcuffs M how is that decided so I can only talk about my experience because I haven't I haven't really seen the details of of other companies deals especially private companies but I know that for us it's it's a shareholders who get to earn out so if for example the company just 100% belongs to the CEO

it's only the CEO who get the earn out if there is like some tech people in if there is some other if the company has a stock plan like an employee engagement plan with uh option program or something then all the employees get R so this is how it works and naturally in the course of the diligence our Target is also to identify the key personnel uh the Senior Management person Personnel I mean again we try to we kind of try to see clear out of this key employee Concept in faction because we honestly believe that every employee is a key employee every every single employee in our group is contributing to our overall success and we really want them to feel that we value their contribution and this is how this is how we imply this principle of ownership because if it's your company and if you're also a shareholder no matter how much that is it's also so it's on you to give your best for our

Collective success and uh in terms of the senior personnel there are different instruments to basically retain the key the key team members and sometimes it's a signing bonus sometimes it's the opportunity to give a better salary a bigger salary because you see uh one of the reasons we're doing uh m&a in uh in game Services is because the playground is so unlevel it's crazy because it's very difficult to compete for the people which is again the key the key aspect for every success uh it's difficult to compete with uh the Giants who are offering you know like Sky High salaries and crazy benefits and have like a massagist come into the office every day and you know like having their own peach tree in the backyard and all this so it's really difficult so we want to kind of in a way level the playground to give the founders their ability to attract and retain the best talent and yeah

absolutely golden handcuffs it's it's a funny it's a funny thing I'm actually going to I'm going to use that in a way because yeah it's it's a completely new way to think of it so I'm wondering so like okay senior people like the one you identified you didn't want to call them key employees but you know the ones yeah just out of Interest like in these deals usually is there like a clause that basically if you buy a company and then like 75% of the employees just leave and it's just the people left with the gold handcuffs would that like void a lot of these like are there any restrictions for that or like that's something that could happen I would say that this is a very like theoretical situation because okay it's it's really it's very it's highly unlikely I would say because why we look for the existing companies and why we want to buy the expertise instead of like growing it in house because we want an established team people who know each other who work with each other who

understand each other and this is the thing this is also why Amazon and Google Studios basically failed because they didn't they they thought that if you bring the indry veterans together they will magically start making new great games but this kind of teamwork and this kind of magic that creates really truly great project it actually comes from time from people like working together and liking each other other and actually like their workplace and bringing their best to work so I don't think it's likely because we also hope that well I don't think either of us is working for just for the salary right we also want to feel that we're doing something important and we also want to enjoy our we are millennials after all yes we have our standards exactly we no longer just close our computer at the end of The Working Day and just go home and forget about it till the next morning so yeah I guess cool so shifting gears a little bit uh

so I read a HBS research paper that said that the m&a failure rate is between 70 to 90% depending on the industry what's the gaming Services failure rate and why is it so high I do not possess the data about the uh our industry failing rate but I do see some cavat that can potentially lead to a failure because well buying buildt consists of obviously buying but the other more difficult part because I mentioned before that the real work starts after the acquisition right um it is a huge it's is a huge amount of work and it's tied very closely to why you are you are acquiring this company uh in the first place is it gain the expertise that you didn't have is it uh acquiring more titles

licenses clients portfolio changes or anything it's entering the new markets going into let's say southeast Asia or going to Americas or late in America or anything and uh obviously getting revenues and profits on balance sheets is is amazing especially for a public company but m&a can all only take you this far if you're not integrating the company um properly after the acquisition there is a very huge risk that you won't be able to thrive in this like super highly competitive market and for Studios it's competitive because thousands of games are released every month of for game Services because there are thousands of agencies uh claiming to provide the best in-class services and I think one way to make things work between the two companies is first of all having

realistic expectations and a clear plan of what you want to achieve through this acquisition second thing is having this unified Financial system that allows you to understand uh different Accounting Standards because one in Germany and one in the US are going to be completely different uh the way they book revenues because for agencies it can mean that they they count as revenues every invoice got by clients without the the deduction for for the traffic acquisition costs it can be profits it can be something in between I mean every company had their own accounting standards and this is something that you really have to consider especially if revenues and profits and balance sheets is your it's your biggest goal um well business strategy is also one thing because for us like when fuction Accord audien we had a clear goal of diversifying our portfolio with influence marketing because this is something that's lots of our clients are already doing and I think it's getting

more and more attraction so in our strategy is that we enhance audience L with our support and with our client portfolio and with our Tech and audien L in turn allows us to improve and broaden our offer to our existing clients allowing us to better and uh this is the this is the perfect example I think of a Synergy that is being executed and this is also something that can be easily overlooked by just chasing the V Bel stacking companies on top of each other yeah it's never actually working in the in the long term the real growth uh is organic growth so when the company is showing better financials after being acquired this is what you're looking for and I think that it's also kind of shaping the new verion and acquisition markets investors actually expecting to see how the acquisition has improved both of your company States and obviously every buyer what kind of time

frame usually do they look at for that like is it like you need to see synergies within 3 four months or like is it a year or like or I'm assuming since you publicly trade it it's instantaneously witness with a share price fluctuations correct uh it depends sometimes I mean right now the market conditions are such that the stock market does not react that much of the news for emergence and Acquisitions because everybody is just taken back by the world's events but usually yes the share price the share price growth is something that every company is targeting for after merging acquisition because it means that every shareholder is getting their value and it means that the strategy is working of course um well return on investment on the deal especially knowing how much you're paying in in in U in a multiple of company profits means that you actually have to be sure that you getting the value you actually have to be sure that this Synergy is going to

work because if we're talking about the gaming company let's say um you are buying a publisher a work for hard developer and a developer that for example has some super expensive licenses and some really like long-term um relationship with let's say Korean Giants who like super close reserved and they not so Keen to work with rest of the world right uh what is the possible Synergy I mean obviously what comes to mind is that you got a publisher the publisher is going to publish uh developers games and that's it unfortunately it doesn't always work like that because a publisher can be specific with let's say some sort of Indie party games right or some sort of retro games or MPGs and if the developer is making strategies for example it's not going to work because they simply didn't have the expertise however if this particular developer is sitting in the US and there is a work for high

Studio that is sitting in let's say Indonesia it means that the costs are much lower and it means that some of those some of the work for the developer can be outsourced by the team of the work for her and this is a kind of collaboration that makes more sense in this this triangle yeah cool so I think we've been through pretty much everything from how you find it how you find companies how you buy them how the deals are structured so for the last couple of minutes uh I actually justed want to yeah get the crystal ball out let's talk about the future so like current prediction right now like Market is consolidating like crazy who do you think will be next uh in terms of big cap like yeah the big cap o well everybody was uh a little shaken by the again how Electronic Arts just snatched the code

masters from take two and I think everybody has been discussing the acquisition of Activision by Microsoft that's not the future Elena that's happened already yeah I know I mean you you need to understand Felix that being being a part of a public company means that you have to be super careful in in every speculation that you make because you kind of representing this company and this is also something that they let's say if you if you look to sell your company be sure that all the employees understand they have to comply to the public company standards because everything you do or say is actually going to affect the share price so I would say that it's much safer for me to talk about you know like the past deals I must say that I can see a clear Trend that the organic growth is becoming more and more important like something I mentioned to you the investors want to see the synergies uh another Trend that everybody is obviously buzzing about is

that pay to earn play to earn nft and all this stuff I have no clue all right I think that's here I have the position of more conservative uh gaming Bankers we want to wait and see we want to wait and see if if this is a bubble or if this is like a real thing so this is not entirely something that I can speak about with certainty but again yeah I I think that's understanding that predictions and forecasts are just you know being basically grown and not calculated you sound exactly like ma now so yeah doing the preds but this is the thing you know it's it's easy to kind of uh create an image of this expertise and this Clairvoyance that oh yeah I'm certain that this and this going to happen in sex bace in gameing Services space I can definitely say that the companies who provide additional tracking Solutions and data science and everything from agencies to platforms is going to be data oriented because we are becoming more and more

blind about where our user comes from who he or she is and uh how they're spending uh there's more and more different ways of targeting uh emerging some of them are coming from other Industries such as e-commerce for example I know that retail is doing something creative with context targeting and everything around well I mean e-commerce is easier right there's like a Sports website and you can advertise like sports equipment and sports clothes with gaming it's a little different because Mobile gaming is more casual it's not like an average I don't know 44 years old American woman is is changing is is reading Kotaku or uh PC Gamer in terms of finding like some new games uh it's going to be a little more difficult so everything that gives us transparency and control over the audience is going to be hard with gaming Studios uh I don't know I think think we all can see that the AAA um games are

now much slower to be released I mean last year hasn't exactly been that rich you know with AAA so that might mean that there's more space for able a or even India companies actually taking their their Spotlight so a lot of opportunities I think that our Market is nowhere near um being like on its peak it's still growing I was just reading the I think it was new report that the gaming Market has grown for 5% over the last year and 5% in billions is actually a lot of money so yeah I'm super excited just as you are to see what's what's the Future Has for us so let's see cool all right final question and then we're done but so I want to do a little model situation so and basically get your two cents on it so uh Felix's gaming company in Co or Felix's Service Company and Co has not like basically I have a company and no one's knocked on my door and I

want to get sold yeah I want to take the money I want to get a beach house I want to be happy and you know yeah get a race car I don't know so if I have a company right now and I want to get sold but you haven't been discovered because maybe you have bad marketing or something like that how would I go about that o first of all I would say that buying a race car is probably the worst rationale for selling the company because I think the first thing you need to you need to Define is why exactly are you willing to sell like if you just want jump on the hyp train and just like oh everybody is selling I will sell as well uh that's not exactly going to we you anywhere and this is your business this is your baby you've been contributing like so many sleepless nights to it you've been like you know blood and sweat for making it grow and you need to understand where you want to see a company in 3 to 5 years I mean honestly it sounds like a little dated AG question like where do you see yourself in 3 to 5 years but

it's actually like super important because this defines the criteria for your potential buyer because it's not you're just like being bought it's also you're choosing your new home and you're choosing your new cloth as partners and what do you need to grow do you need an investment do you need a presence in China do you need an expertise in let's say PCN console by you only have mobile so there's also a chance that you see okay I've done enough on my own this is the ceiling that I've reached and there is nothing else I can do on my own and I need like a trusted partner to to level up that's amazing and I think this is my personal favorite TP of acquisition which means the founder is involved which means that the founder is really like willing to take that next level and yeah that's that is that is the best rationale and obviously you need to know how much you can expect right and where're back to that multipl conversation uh let's say if you're not generating revenues yet um you are let's say in this stage zero right maybe you

have a prototype maybe you're just in soft lunch in that way I would recommend just take an investment from a good fund uh from a good VC or a good fund because in the future not only they will be able to give you like the money you need to scale to hire like new people and all this stuff but they can also provide you with guidance on the markets uh good VC can in future introduce you to your um future buyer because they have a portfolio of assets and sometimes they want to exit and sell their part and they can you know showcase and highlight you to the prospective buyers um that's the best way if there's nothing so so if I'm summarizing in a no way what you're saying is uh if you haven't been approached don't approach us we'll find you well um it depends it depends on the maturity I would say that uh you should definitely apprach invest speak is this is what they are there for they don't have enough time and bandwidth to just

you know no no I meant the then like m&a like to actually get acquired like yeah you shouldn't approach you guys and be like buy me I would say it's not in your best interest because if you're tiny and the multiple is let's say well okay model situation you get like 100k right so let's say we're giving you 10x your 100K at to get M right so basically if you only had like 200k you would already have to mil and this is like exponential you know and I think that selling in the beginning is not the greatest idea because you will not going to gain much after that and again it's going to kind of difficult the trust levels from from the potential buyer if you don't have the track record I mean bring it all on if if you've been I don't know if you worked on Angry Birds say it if you've been in supercell if you've been in I don't know kamami or somewhere else just say it say it prove them that you have done something that there's a track record of your successes in the past and that could also be an argument but

otherwise it's going to be just a little more difficult to to sell the idea to the buyer why he has to you know open his wallet and give you more cash beautiful that was a great way of finishing I think uh I want you thank you so much for coming on the Pod uh yeah we had a I had a great time discussing I learned a lot uh thank you everyone for listening and tuning in uh don't forget to like And subscribe and we'll see you again next week thank you phelix thank you bye