BloombergBusinessweek has a lengthy article about the strange courtship between Chinese industrial companies and Western game studios like the one that came up with Talking Tom Cat which was sold to Zhejiang Jinke Peroxide Co. The article noted:
There’s been a recent flurry of oddball pairings between Chinese industrial interests and Western entertainment companies. A real estate magnate in Beijing bought Legendary Entertainment, the movie studio that made the Dark Knight trilogy, for $3.5 billion. A maker of construction materials bought Framestore, the company behind the special effects in the Harry Potter films. Zhejiang Dragon Pipe Manufacturing Co. acquired app developer Entertainment Game Labs. And perhaps strangest of all, Digital Extremes Ltd., which created an alien battle game, and the studio Splash Damage Ltd., which made an offshoot of the Xbox hit Gears of War, were bought by an enormous Chinese poultry processor.
Around 70% of all acquisitions of game companies since 2015 have been by Chinese buyers. Why would Chinese industrial companies want to acquire video game or entertainment companies? BloombergBusinessweek goes on to explain:
The deal activity can best be understood as a consequence of quirks in the Chinese stock market. In China, industrial companies trade at valuations they’d never receive elsewhere in the world. Affan Butt, an investment banker who helped facilitate the sale of Jagex, says some may trade at as much as 100 times their annual earnings—more than four times the multiple of General Electric Co. This means they can acquire companies at what is effectively a discount. A target like Jagex is worth more once it’s part of a Chinese-listed company, allowing the acquirer to pay prices that appear bafflingly high to the rest of the world. Zhongji “saw that arbitrage opportunity,” Butt says.
There’s no small amount of financial engineering at play, say bankers and lawyers involved in the purchases. Chinese companies are betting that by adding game studios that have better margins than a stodgy industrial business, their stock price will rise. Regulators and investors in China focus almost exclusively on a company’s bottom line. In Shanghai, a company must show three years of profitable operations before listing. And once a stock is trading, it suffers if a company doesn’t have new sources of profit. With games, Butt says, “you can buy profit.”
To read the whole article, Why Did a Chinese Peroxide Company Pay $1 Billion for a Talking Cat?, go to the website of BloombergBusinessweek.
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