The Future of M&A, Interview with Russell Mifsud, Head of Gaming at KPMG
In the wake of the COVID-19 pandemic and its continuing impact on global financial markets, executing M&A deals can prove to be a challenging task.
Forward-thinking leaders need to act to optimise their company’s resilience—rebalancing for risk and liquidity, while assessing opportunities for growth coming out of the landscape.
We caught up Russell Mifsud, Director and Head of Gaming, KPMG to hear his thoughts on the future of M&A in both Europe and the USA for the iGaming industry.
How has the current landscape impacted the M&A trajectory in the iGaming industry?
“We’ve seen a trajectory of industry consolidation over recent years. Regulatory enforcement in major EU jurisdictions is increasing the importance of compliance for companies involved in mergers and acquisitions. In fact, we often find that regulatory considerations are now intrinsic to most transactions.
Earlier this year, we’ve seen Red Tiger and Netent and now Netent and Evolution.
As the margins continue to be squeezed, pandemic fuelled or not, there’s a heightened need to benefit from economies of scale.
But it’s also about looking at things strategically and understanding how certain processes could potentially benefit other processes from another business. It often comes down to the synergies.
If you look at two game studios or even two content providers, if one solution can essentially compliment another (which would translate into heightened speed to market or perhaps a broader offering) then there may be a business case to explore further.
When Operators are in a position where they are motivated to look for other avenues to optimise their business, one of the more obvious avenues would be re-negotiation with third party suppliers to try and adjust certain terms and alleviate certain pressures.
For example, we’ve seen that over the years the integration fees have started to be reduced or fizzled out all-together as a result of a tougher B2C market.”
What are some of the motivations for an M&A?
“When we look at M&A from a B2B standpoint, we can see that there are going to be certain benefits from an economy of scale or even the speed to market.
But there are also other variables that play a role in the equation. Such as new market penetration, especially in restricted territories with finite licensing windows. Capitalisation of the value chain, be it horizontal or indeed vertical are also additional motivators – it is fair to assume that an affiliate strong in lead generation, could potentially leverage its competitive advantage to other areas within the value chain outside that of its core competency, in order to introduce new streams of income beyond that of their core competency.
Although, an organisation turning up ‘late to the game’ would often look to avoid reinventing the wheel with its own developed IP, which could spur on a transaction.
At this point in time, it forces you to look at the business, look at the insight that you have and potentially realign revenue generating opportunities. For instance, we expect to see other players start to enter the remote gaming ring, who are not necessarily connected nor associated to the gambling space, but regulation has legitimised the opportunity.
They could be media outfits that could utilise their advertising might to rival longstanding operators within their home countries.
A couple of clever M&A targets could help fast track efforts all round and close in on the knowledge gap from the go.”
What are some of the challenges businesses face when gearing up for an M&A?
“There are a number of key pointers that we often see stifle the potential behind a deal.
Defining what an acquirer really wants and what stage of the M&A cycle a prospective target may be is sometimes overlooked.
Compliance and Risk Management (RM) are key areas that should be core to any transaction nowadays. The RM aspect underscores the need for a due diligence review and the need to identify and pinpoint the red flags, be it tech, finance or indeed compliance related. Investigating the IT infrastructure, IP rights, third party agreements and both the historic/anticipated compliance audits are all pertinent considerations too.
The post-deal integration is another area that we have seen many operators across the industry overlook or indeed underestimate over the years. Particularly from a leadership standpoint, especially if different cultures are involved.
On the leadership note, I think it’s also fair to highlight the shift in founding CEOs, who built successful gambling operations from the bottom-up.
M&A, as a result of the externalities, often requires a different skill set to navigate through today’s compliance considerations and expectations. This could be a reason that spurs on various contractual arrangements alongside heavyweight professionals stemming from a more traditional background.”
What does the future of M&A look like in the USA?
“It’s fair to assume that the US is set to become the biggest global market, and you’ve got some mammoth players over there.
It would be interesting to see whether the big four (from a tech standpoint) begin to consider the gambling sphere in some shape or form. If they were to come into the space, they would start to rival some of the longest standing operators or content providers. Once again, you would expect this to be spurred on from M&A, just as we’ve seen with the various funds, VCs, PEs and newly listed Nasdaq operators.
It makes sense to carry on gearing yourself up, to continue looking for avenues to optimise and cleverly grow your business. This has the potential to give a business the first footing and utilise a competitive advantage.
The US is a different beast entirely, as the amount of transparency needed for a transaction is incredible. There has to be an awful lot of thought into the terms of the ownership and the directors, it’s a different playing field entirely.
These are just some of the considerations from the due diligence side that need to come into play when looking at US M&A. At least through the minds of the US based acquirers.”
What about the relationship between European companies and US based businesses?
“What we are seeing at this point in time, as more and more states start to regulate, are more large organisations attempting to close the knowledge gap between iGaming and landbased gaming.
Whether these are VC’s, PE’s, Angel investors or landbased operators, it’s beginning to become a lot more mainstream. We’ve seen JVs happen, whether it’s the GVC’s and the MGMs or the GiG’s and Kindred’s with the Hard Rocks.
In some cases, you see the likes of Bet365 actually going in and acquiring a stake, which is particularly interesting. It showcases the might behind Bet365.
I think that that the Americans, at least from the conversations that I’ve had, are not going to be overly comfortable with key decisions being made from Europe as a result of a minority stake in a European business
If something happens with their business, they want to have that element of control.
I believe we’re going to see an increased appetite to in acquiring businesses.”
What business profiles are likely to be involved in M&A’s
“There’s a set type of profile. You’re essentially looking at regulated businesses. You can look at a little bit of grey, not dark grey, but licensed businesses.
You’re looking at a multiple of about five to seven figures, maybe eight in some cases. And you’re looking at B2C primarily with its own IP and licenses, in order to gear the US-based investors up.
They may have a team based in Europe, and considering Malta’s presence in the global iGaming marketplace, many of the teams tend to locate here.
This will help close in on that knowledge gap whilst allowing them to take the IP back home for an American audience and handled on local soil.
And of course, COVID-19 has helped fuel this, it’s certainly created more of a buyer’s market.”
Editors note: From speaking with Russell it’s clear that future viability of M&A depends on C-Suite action. Through effective repositioning, leaders can outmanoeuvre uncertainty and outperform those less prepared.
M&A is an established part of the CEO playbook and we can expect to see an increase in deal activity as the year progresses and we learn to live with the ramifications of COVID-19 .