How Embracer became Europe’s largest gaming group

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Lars Wingefors’ 13-year-old self would approve of his recent purchase: Dark Horse Media, one of the largest independent comics studios in the world and home to iconic titles including hellboy and city ​​of sin.

30 years ago, while studying at a secondary school in Sweden, Wingefors started selling second-hand comics and had dropped out of high school by the age of 18 to concentrate on his fledgling mail order business.

The acquisition of Dark Horse, which closed last month for an undisclosed sum, was part of a three-year buying spree that took Embracer Group from a small and obscure PC games developer into the largest gaming company in Europe by market cap by value from 93 billion $9.9 billion).

“I think we’ve created something really unique that’s very difficult to replicate,” said Wingefors, founder and CEO of Embracer, which owns a 23 percent stake.

Dealmaking has risen sharply in the gaming sector since the pandemic began. Big tech and entertainment companies have sought to lay claim to a finite pool of talent and intellectual property, and to expand their exposure to an industry already eclipsing other forms of mass-market entertainment.

Wingefors rebranded its company from THQ Nordic in 2019 to usher in a new era of consolidation. Wingefors was one of the most business-hungry executives in the industry, keen to expand his empire into a formidable rival to Ubisoft in France, Take-Two Interactive and Electronic Arts in the US.

Since early 2020, when Wingefors flew his private jet across Europe to meet gaming entrepreneurs, he has made 62 acquisitions for a total value of SKr 77 billion (US$8.1 billion). The largest was a €2.75 billion takeover of French board game maker Asmodee in December.

But Wingefors, known for its laid-back approach to integrating acquired companies, faces the mammoth task of managing such a vast and sprawling empire that spans multiple genres of interactive entertainment. The ever-evolving Embracer is already presenting challenges to investors and analysts trying to measure its value against peers.

Toby Clothier, an analyst at asset manager Mirabaud Securities, said the company was becoming “more and more incomprehensible”.

“By the best will in the world Lars can’t know what’s going on, it’s impossible to keep track,” he added.

In its latest financial report for the third quarter of 2021, Embracer reported a 135 percent year-on-year increase in net sales to SEK 5 billion and a 70 percent increase in earnings before interest, taxes, depreciation and amortization to SKR 1. It also reported 16 percent organic growth in its games division, regardless of recent acquisitions.

Jefferies gaming analyst Ken Rumph described Wingefors’ strategy as “anti-synergic” and “aggressively decentralized,” which sets it apart from other high-acquisition-driven companies in the industry.

“It’s just sort of a pooled pool of video studios,” he said, adding that Wingefors seemed “bizarrely relaxed” at times when he dismissed the need to find ways to merge his businesses when there’s obvious overlap.

But Wingefors believes that “it’s not that difficult” to manage a complex and growing network of 112 entertainment studios across Europe, and underscores the value he places in selecting “entrepreneurs with a successful track record” and adding them to himself leave.

“From a commercial perspective, we don’t have central commercial decision-making,” he said. “If you look at other companies, they struggle, when they put in too many layers of directors and management and start controlling the creators, then they start to fall apart.”

Dealmaking in the gaming sector has increased over the past decade and this year hit a record high in terms of deal value, buoyed by Microsoft’s acquisition of Activision Blizzard for $75 billion and Take-Two’s acquisition of Zynga for $12.7 billion.

Column chart of global gaming-related M&A deals value in USD (Bn), showing deals in the gaming industry have increased sharply since 2019

The hunt for strong game titles and successful studios has made the landscape highly competitive.

But in a hit-driven industry, Wingefors has taken a more scattergun approach than its rivals. Embracer has tended to buy up smaller studios that make lesser-known games rather than blockbuster deals favored by companies like Sony, Tencent, and Microsoft. Embracer’s list includes the loot shooter game border areasthe street gang adventure series Saints Rowand goat simulator, in which players simulate the life of a goat.

“If you can make one game, you have a lot of business risk, but if you make 200 games like we do, there’s less business risk,” he said.

This strategy works both ways and also reduces the risk of Embracer being eaten by a bigger fish in the hunt for so-called AAA games, the gold dust of dealmaking madness.

The partial return to normal after the worst of the coronavirus pandemic and the outbreak of war in Ukraine have both dampened investor appetite somewhat in the sector as most companies’ share prices have fallen significantly over the past year.

Nonetheless, Staffan Ekstrom, a partner in EY’s investment banking arm who has worked on most of Embracer’s deals, is confident that the pace of dealmaking is likely to increase as the battle for strong games and new technologies intensifies.

Wingefors said it plans to make a similar number of acquisitions in the coming months and years and will look to expand into newer markets, including the burgeoning free-to-play gaming space, as well as countries like the UK and the USA, Poland, France and China.

But while it’s clear that Embracer’s acquisition strategy was well timed for the gaming boom, it’s less obvious whether Wingefors will be able to propel its uneven empire to new heights through a period of major market turbulence. Embracer is heavily impacted by the war in Ukraine, with 1,000 employees in Russia, 250 in Belarus and 200 in Ukraine, many of whom work on game development.

For Jefferies’ Rumph, Embracer’s success “might just be a fluke of timing.”

“The concern is that they’re going to spend more money just as consumers are about to rear their horns,” he said. “You think you’re a genius when you buy a shabby house in a mediocre suburb and renovate it because you think it’ll bring in more money. But in the end it’s still just a flimsy house in the same place.”

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