The Reuters news agency reported on October 1st that in Hong Kong. According to sources familiar with the situation, Tencent is shifting its mergers and acquisitions strategy to focus mostly on acquiring controlling holdings in international gaming businesses as the internet giant looks to global expansion to counter slowing growth at home in China.
Over the course of several years, Tencent Holding Ltd (0700. HK) has invested in hundreds of start-ups, mostly in the onshore market. The company has historically been a passive financial investor, acquiring minority stakes and maintaining such holdings.
But today, according to four sources close to the situation who spoke with Reuters, it is actively trying to acquire majority or even controlling holdings in abroad targets, particularly in European gaming businesses.
A solid portfolio of chart-topping games is essential for the future expansion of the world’s largest gaming company, which is banking on worldwide markets, according to the sources.
After two years of repression and uncertainty, which hurt on sales at home and sparked a big selloff in their stocks, China’s internet titans are attempting to emerge from the regulatory shadows, as demonstrated by Tencent’s new approach.
One of the individuals, and another with direct knowledge of the topic, have indicated that outside of the main gaming industry, Tencent is also aiming to buy up worldwide assets, in particular in Europe, relating to the so-called metaverse.
For privacy reasons, the sources asked not to be named.
According to Reuters, Tencent stated that the company’s overseas investments began “far before any new restrictions” in China. Without providing specifics, the business stated that it seeks “creative enterprises with excellent management teams” and allows them to flourish on their own.
According to three of the people, Tencent is trying to increase its interest in gaming companies at a time when other internet giants like Microsoft, Sony (6758.T), and Amazon are purchasing gaming assets and related intellectual rights.
During an August post-earnings call, Tencent’s chief strategy officer James Mitchell stated that the business will continue to be aggressive in its pursuit of new gaming studios in other countries.
According to him, “our objective in terms of the gaming business is… to focus on growing our skills notably in the foreign market.” “We will be extremely active in purchasing new gaming studios outside of China,” the company said.
Pursuit of Bigger Stakes
Since the regulatory clampdowns have escalated, and after selling off a number of domestic portfolio businesses, Tencent has shifted its attention to assets and markets outside.
According to Refinitiv statistics, the owner of China’s most popular messaging app, WeChat, would have invested a total of $75 billion in domestic projects between 2015 and 2020, while only having completed 102 acquisitions totalling $33 billion in international markets.
The paucity of game approvals in China and laws that limit playing time contributed to Tencent’s first quarterly top-line decrease, which was revealed in August. Online gaming revenue dropped by 1% in both the United States and internationally.
Its stock price in Hong Kong has dropped by almost 60% in the past two years.
In light of this, according to Refinitiv statistics, Tencent has made very few investments in China so far this year, whereas it has completed 27 agreements outside of China for $3 billion. According to Reuters sources, the company has been lowering its portfolio in part to appease authorities and in part to reap significant financial benefits.
To increase its investments and presence in global markets, Citi analysts predicted in a study released in early September that Tencent will “continue to make reasonable expenditures to acquire premium gaming content and talents and develop collaborations with top-tier studios abroad.”
According to the four individuals, if Tencent were to pursue larger holdings in its current gaming portfolio or new targets, it would offer the company a greater voice in the operations of such enterprises and help it obtain the rights to the intellectual property of popular games.
With Beijing’s tight restrictions on domestic game approvals and the continued suspension of approvals for games based on foreign intellectual properties, the four sources claim that Tencent is compelled to move towards acquiring control of international game businesses and their IPs.
With its September increase, Tencent became Ubisoft’s (UBIP.PA) largest stakeholder, with an 11% holding that may be extended to as much as 17%.
Tencent’s purchase of Sybo Games, makers of the smash mobile game Subway Surfer, in June and its 16.25% share purchase in Japan’s “Elden Ring” producer FromSoftware in August set the stage for the Ubisoft acquisition.
One of Tencent’s largest international deals since the regulatory crackdown in late 2020 was announced last year when the company agreed to pay $1.3 billion to acquire British videogame maker Sumo.
Tencent spent $8.6 billion in 2016 to acquire Supercell, the developer of the smartphone game “Clash of Clans.” Prior to this, Tencent had largely negotiated minority transactions in Europe, such as its purchase of 9% of the British gaming business Frontier Developments.
According to two insiders, Tencent plans to raise its investment and expand its presence in Southeast Asia since the area, home to 650 million people, has the potential to emulate the success of China’s internet growth.
Singapore is already home to the worldwide game publishing division of China’s top social network company.
The business has been quite vocal about its desire to increase the percentage of gaming income generated from markets outside of China from the current 25% to 50% during the past year. They did so by introducing Level Infinite, a new publishing brand, in Singapore in the month of December.