Why Square Enix's $300 million "underselling" studio is a reasonable move

*This article is compiled from IGN US and is not reproduced without authorization.

Today, game acquisitions have become regulars in the news section, and the headlines are often billions of dollars. Microsoft bought Activision Blizzard for $68.7 billion, Sony bought Bungie for $3.6 billion, and several billion-dollar acquisitions, which seem to be the norm in 2022.

So the recent acquisition that just made the headlines was a bit of a surprise, at least at first glance, because the number was much lower than we expected— Embracer only spent $300 million to buy Three square Enix (SE) studios and the main IPs of those studios, including Tomb Raider and Breaking Bad.

300 million can buy a veteran studio that has received a lot of praise, and also package up to buy their decades-old IP, which looks like a "broken bone", right? Especially when compared to other acquisitions. At least, from the player's point of view, it really is. But SE previously said in its earnings report that many of these studios' works, while well received, were commercially disappointing. And the company has already said it wants to invest in blockchain, AI, cloud games and other technologies. With that in mind, studios that have been developing story-to-single-player games in the past may not quite align with SE's future direction.

That means the deal is likely to be a good thing for all three studios in the long run.

Shocking bargaining?

For those of us keyboard analysts, $300 million to buy Laura Crawford, Guardians of the Galaxy (but whether you can continue to play Marvel games in the future depends on the meaning of the copyright owner), Adam Jenson of "Out of the Siege" and other characters, which is simply a "bright robbery" in broad daylight, but according to Ampere Analysis analyst Piers Harding-Rolls, this price should be a combination of factors, it is likely to be a reasonable price.

"Prices are like that, it's based on Embracer's business assessment and Square Enix's willingness to sell," Harding-Rolls told IGN, "There are some factors that affect specific prices that we don't know, such as operating costs and the game development process, so we don't have all the information we can get to accurately assess the price."

One of the main reasons may be money alone. As Niko Partners analyst Daniel Ahmad pointed out on Twitter, in 2021, profit margins for Eidos and Crystal Dynamics will be much lower than for SE as a whole. This is not to compare individual studios to the entire company, but it just shows that these studios contribute very little to the overall profit of se. Both analysts also pointed out that SE has long wanted to sell these studios.

"These studios haven't been able to deliver a steady commercial success to (SE), and the company wants to streamline the organization and tell shareholders a more engaging story of growth and profits," Harding-Rolls explains. From a business perspective, the deal puts them in a better position and provides a stable foundation for future growth."

In 2021, Crystal Power will have a profit margin of 3.6%, Yidun Montreal's margin of 0.65%, and SE's overall operating margin of 14.2%, Ahmad said.

Considering that most of these studios' major projects will have to wait years to bear fruit, the price is even more reasonable, and even Embracer's announcement emphasizes that the acquisition will not bring any significant revenue boost to Embracer in the next two fiscal years, other than selling old games.

Crystal Power has only recently announced that it will use Unreal 5 to make the new Tomb Raider, and the game will definitely be years away, in addition to the fact that they are working with Microsoft on a reboot of Perfect Darkness. Yi Duo just launched "Marvel Guardians of the Galaxy" last year, and SE Montreal Studio has not produced much after doing several "GO" mobile games.

Considering that there are not many development plans in the next few years, and the performance of recent games has not met expectations (such as "Marvel Avengers" and "Marvel Guardians of the Galaxy"), this low price is beginning to seem reasonable. After selling these studios, SE can get a large amount of money to invest in their areas of interest, and in the future, it will no longer have to worry about the operation of these studios, and can focus on other subsidiaries. As Harding-Rolls points out, this allows SE to paint a picture of more profitable potential for shareholders.

So what is Embracer? Embracer has been acquiring companies like Gearbox and Board Game Maker Asmodee. Although the purchased studio has great potential, such as the hope of building successful works based on well-known IP, Harding-Rolls pointed out that this move is not without risk.

"Embracer needs to invest a lot of money in the next few years and won't see a significant return on investment for a few years, but it has also gained a lot of powerful IP and series that could easily exceed $300 million if it could make a good game," he said.

Embracer's announcement even specifically mentions that the company has secured additional loans from banks to fund these acquisitions. As Embracer CEO Lars Wingefors said in an interview with the Financial Times in mid-April, putting eggs in several baskets mitigates the risks of one basket.

"If you can only make one game, there's a lot of business risk, but if you can make 200 games, like we do, it's even less business risk," he said."

Since Embracer's definition of "success" is more relaxed, the situation of these teams may also improve after the owner changes.

An example of success after leaving Square Enix

The three studios sold by SE have a number of popular series, including the critically acclaimed series of first-generation works, sequels, reboots, and more. But considering that these games were often not popular when they were under the SE umbrella (at least by SE standards), the $300 million price tag seems reasonable.

In 2013, the critically acclaimed Tomb Raider reboot sold 3.4 million copies, but it still didn't meet SE expectations. The other two, developed by European and American studios and well-regarded, hitman 5: Pardon and Rogue blood, did not meet SE's expectations that year. SE president Yosuke Matsuda said a few years later that their expectations for Tomb Raider were "extremely high," but that game sales at these studios have been disappointing over time.

In the years that followed, the "Deus Ex" series was also largely out of the news, and in 2017 it was reported that although "Deus Ex: Human Division" received a good response, the development of the series has stalled. SE Montreal has also stopped developing the "GO" mobile game series, which has won many awards. Marvel's Avengers was rated by SE as a "disappointing result". Recently, Yiduo's "Marvel Guardians of the Galaxy" did not meet its sales target at the beginning.

Many years after its release, critics and players are still praising many of these games, so whether SE's standards are reasonable or not is really debatable, but as Ahmad pointed out on Twitter, SE's European and American studios have repeatedly underperformed, while Japanese studios have consistently made good earnings, with Final Fantasy 14 and its latest expansion pack, Atsuki Endgame, and 2020's Final Fantasy 7 remake selling well.

SE is a company that is accountable to shareholders, it needs to maximize profits, it needs to pay attention to – at least for now – blockchain technology, so these studios may not be suitable for SE. Maybe under embracer, who has different standards, they can turn these acclaimed games into blockbuster games, because people obviously still like these masterpieces.

Although only 12 million copies of the entire Deus Ex franchise have been sold, according to information disclosed at the time of the acquisition, the total sales of the Tomb Raider series have exceeded 88 million, of which the reboot trilogy accounts for 38 million. It's clear that the series has a loyal following, and Embracer expects the acquisition to strengthen their AAA lineup, increase the number of well-known series, and expand the potential player base.

There was already a studio that was seen as a "commercial failure" that had succeeded after leaving SE – IO Interactive, developer of the Killer series. And the IOI wasn't even sold by SE — se directly announced a divestment from the IOI in 2017. Later, Killer 2 (2018), released by Warner Bros., received high praise. IOI's own release of Killer 3 (2021) has taken to a higher level. The IOI called Killer 3 the most successful work in the series, and it brought the company's revenue and profits to new highs.

IOI's current development plans include several unpublished games and an untitled 007 game, and while we can't say for sure what IOI would have looked like if it had stayed under the SE umbrella, it's clearly no longer the same studio that was in a commercial predicament nearly 10 years ago. After being acquired by Embracer, Crystal Power, Art Capture Montreal, se Montreal may also be able to get a new starting point like IOI. After all, Embracer doesn't seem to be planning to put too much pressure after the acquisition.

In an interview with the Financial Times, Embracer CEO Lars Wingefors said: "From a business perspective, we do not engage in centralized business decisions. If you look at other companies, when they have too many directors and management and start manipulating creators, they start to struggle and start to collapse." These teams may need to adapt to this management philosophy, but this management may be able to reproduce the success story of "Killer", and as Harding-Rolls said, in the end, it may be the best thing to do.

"Considering that Japanese publishers typically operate in a highly centralized way, that decentralized approach would be a culture shock for these studios," he said. Arguably, this unshackled their business shackles." Embracer itself has this idea, according to the company's presentation on the acquisition, they are convinced that "in Embracer's operating model, these studios will achieve outstanding results."

Embracer has many subsidiaries such as Dark Horse Comics, Koch Pictures, and Ash Magic Bag

And similar to Sony's acquisition of Bungie, this change of ownership has another benefit for these studios - multimedia. Phil Rogers, CEO of SE Americas & Europe, said: "Embracer has enabled us to forge new partnerships across all media to maximize the potential of our IP and realize our dream of creating exceptional entertainment products." With the growing importance of well-known IPs in the "content wars", it's no surprise that these teams want to give their beloved series a new lease on life and adapt them into works from other mediums.

While the price of the deal shocked a wide range of players, the decision was easier to understand after considering SE's business focus, SE's perception of the studio's commercial value, SE's own output, and Embracer's interest in collecting well-known IPs. As analysts say, the studios are likely to have a bright future, but the deal isn't without risk. But at the very least, the IOI after the departure from SE provides a good example of how cautiously optimistic the future of these studios can be taken. It's just that we'll have to wait at least two years to know if they'll succeed. Maybe by that time, we'll be able to recover from the shock of $300 million.