Tencent Holdings Ltd. (00700.HK) and its partners will pay US$8.6 billion for Finnish mobile game company Supercell.
The deal will push the Chinese internet giant to the top ranks of the global online game market.
However, some people are comparing it the acquisition of IBM’s PC business by Lenovo Holdings (00992.HK) 11 years ago.
They say Tencent might suffer the same embarrassment as Lenovo, which struggled with a crippling industry downturn in the PC market after the acquisition.
IBM had a thriving PC business then. Its PC brand was the world’s third largest after Dell and HP.
The business had bright prospects with years of surging sales and profit. Many were surprised at IBM’s decision to offload the business to a Chinese company.
The mobile game industry is red-hot today.
Supercell is the world’s largest player. Tencent owns an 83.4 percent stake in the company after buying out Japan’s SoftBank Group Corp.
Softbank’s Sun Zhengyi is well known for his sharp vision and he has managed to make the most value from his investment in Yahoo, Betfair and Alibaba.
It’s questionable why Sun would give up Supercell.
In the mobile game business, as in the PC market, visible assets such as property and equipment are not worth the price tag.
Instead, invisible assets such as brand and R&D capability are the most important factors when pricing a deal.
The deal with Tencent values closely held Supercell at HK$79.6 billion (US$10.26 billion). The company’s net asset value was HK$7.1 billion at the of last year.
That is equivalent to a price-to-book ratio of 11 times, close to the exorbitant valuations on China’s growth enterprise board.
What attracted Tencent most to Supercell is the latter’s brand and the team.
Supercell has developed four popular games — Hay Day, Clash of Clans, Boom Beach and Clash Royale.
However, these invisible assets are fragile. Brand or talent can disappear quite easily.
Certainly, there are bright spots in the deal.
Lenovo has suffered since smartphones upended the PC industry.
By contrast, demand for games are on the rise.
Even if mobile games fall out of favor, popular games will continue to attract players on different platforms.
That’s why a number of leading gaming companies started their business on PC, console and other platforms.
Supercell accounts for a single-digit market share and the global market remains highly fragmented.
All mobile game developers face the same issue of fickle player loyalty.
Any leading company can easily lose its reputation if one of its games fails to attract users.
Tencent plans to use its social networking platforms such as WeChat and QQ to help boost user loyalty for Supercell.
The deal is expected to create synergy between two companies with different cultures, making the deal more sensible than Lenovo’s IBM takeover.
Lenovo had a market value of about HK$10 billion when it made the offer to IBM.
It was quite a bold move, which meant Lenovo had to borrow heavily to finance the acquisition.
Honestly speaking, the deal is not a failure. Lenovo is a global brand with a market value above HK$50 billion.
By contrast, Tencent has a market value of HK$1.6 trillion and a HK$160 billion cash pile at the end of last year.
It can afford the Supercell acquisition without going into debt and create a new growth engine.
Investors should take a long-term view on the deal.
This article appeared in the Hong Kong Economic Journal on June 23.
Translation by Julie Zhu
[Chinese version 中文版]
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