How did the M&A maniac in the gaming industry become a "layoff maniac"?

In the past few years, thanks to relatively low interest rates and the rapid growth brought about by social distancing during the epidemic, many companies in Europe and the United States have taken mergers and acquisitions as their main strategy for rapid explosion, the most famous of which is the "M&A maniac", Sweden's Embracer Group.

In 2022, Embracer acquired the board game giant Asmodee at a price of $30, and also took SE's three major studios under SE, including Crystal Dynamics, Eidos Montreal, and SE Montreal, in eight locations around the world, with a total of more than 1,100 employees, as well as more than 50 well-known game IPs including "Tomb Raider", "Deus Ex", "Rogue Player", and "Kane's Legacy", at a price of $300 million.

However, with U.S. interest rates hitting their highest level in more than a decade, Embracer's aggressive M&A strategy has been laid bare and its aggressive M&A strategy has been put on hold. Despite consecutive quarters of improved revenue and earnings, the European company is still $1.4 billion in debt as of 3Q3 2023.

What's more noteworthy is that Embracer Group's restructuring plan, which has lasted for more than a year, is still ongoing, with public financial data showing that the company has laid off a total of 904 employees, accounting for 5% of its total workforce, and the number of affected external studios has also reached 191 layoffs. The former merger and acquisition maniac has now become a "layoff maniac".

If you look at the performance, Embracer is at least not at risk of bankruptcy or collapse in the short term, and may even "turn around" in the event of a change in the general environment. However, at present, Embracer's situation does not show signs of optimism in the short term, foreign media GI said that the continued aggressive mergers and acquisitions have made Embracer Group lose its focus on 2A games, and even the game itself, coupled with the impact of high interest rates, the industry has entered the stock stage and policy supervision and other factors, no matter what the outcome of this "disaster" is, it will bring a blow to the European game industry, at least European game industry practitioners are already paying for this reckless development strategy.

Here's what Gamelook has put together in its entirety:

More than 900 employees were laid off, and high interest rates led to the halting of Embracer's M&A engine

The news of layoffs in the overseas game industry one after another makes it difficult not to be pessimistic about the game industry this year.

On the one hand, it's been one of the brightest years for the gaming industry, with everything from highly anticipated sequels to eye-catching and flawless remakes and clever and innovative indie games, and the year has been filled with impeccable blockbusters and commercial success stories from start to finish.

On the other hand, there are layoffs in the European and American markets almost every week, and in some cases, even "restructuring" in the form of laying off a large percentage of the total number of employees, 2023 is a very good year for games, but it is a very bad year for many people involved in the production of these games.

With the entire industry laying off employees, the news that Embracer Group has laid off more than 900 employees in a row as part of a restructuring looks so normal, just another large company laying off employees in order to save costs. However, what is actually happening with this company has a different layer of reasons than most of the corporate restructurings that are underway in the gaming industry, although some of the underlying reasons are the same.

For most of the past 10 years, Embracer Group has been in a "merger and acquisition" mode, transforming it from a small publisher of mid-sized 2A games to the parent company of one of the largest R&D studio networks ever, along with a huge IP library and various side hustles in other media sectors. Today, this rapidly assembled house of cards is crumbling and could collapse at any moment. If that happens, if things get to the worst, then the rise and fall of those 10 years will end up being the worst corporate bankruptcy in the history of the gaming industry.

In a sense, Embracer's story is very simple, and it's just an exaggerated version of what has happened to a lot of other companies in the industry lately. The company used investment money from the low-interest rate era to go on a nearly 10-year "buy-buy-buy" frenzy, acquiring dozens of game studios and a host of other businesses. The original idea was to bring together a large number of 2A game studios, i.e., studios that often release small games with a popular niche user base, rather than spending years of R&D and tens of millions of dollars on a large budget to enter the triple-A market, the theory of which was to create a strong publisher backed by dozens of IPs, rather than relying on a handful of major IPs to stay in business like the existing mainstream publishers in the market.

It's a very good theory, and even a viable strategy, but in the relatively early days of building the group, Embracer's leaders seem to have realized how easy it was to use the investment money to acquire and grow the company with those acquisitions, and then shop around with the new size of the company to get more investment.

As a result, Embracer's acquisitions have taken them out of focus, first on game studios that focus on shorter development cycles, smaller scales, and more controllable budgets, and finally on the games themselves, and even comic book companies and video distributors have fallen into a trap and have begun to cast a wide net to find companies to buy.

At some point, Embracer was just an engine for other acquisitions, and as a rough estimate, in 2020 alone, it acquired more than 20 studios and companies. Along the way, it eventually became the parent company of studios known for their triple-A mega-games and even MMORPGs, not to mention SE's Western studios, and with this acquisition, Embracer became the owner of triple-A blockbuster franchises like Tomb Raider and Deus Ex.

In theory, Embracer is one of the publishers with the most impressive studio and IP lineup of any game company. In fact, it is a company with little experience in developing or publishing mainstream AAA titles, and now has a large number of AAA game studios and IPs, not to mention all the other parts of its vast empire, and most of the company's management has little to no experience with these parts.

In the short term, this doesn't have much of an impact. Management's job is to keep the M&A engine running, sustaining growth by attracting more investment and using it to buy more companies. While these companies are profitable in their own right, each M&A results in Embracer's overall cost base being higher, and for a company of this size, a constant cash injection is required to sustain monthly expenses.

At the moment, it is not clear what the company's management thinks the end result will be. One of the more common speculations is that they believe they are building a diversified publisher that makes it an attractive target for M&A by some of the larger companies aiming to further grow their gaming ambitions. They might really think that at some point, the vast empire would actually start to be self-sustaining in a meaningful way, so the external investment required to maintain million-dollar monthly expenses was only a temporary state.

As a result, neither scenario happened. Instead, the world has changed, interest rates have soared, and the 2010s Saudi petrodollar has suddenly evaporated like a tidal wave across risky corporate areas. Embracer failed to close the $2 billion deal they expected (reportedly with a Saudi media investor) and House of Cards collapsed, facing the reality that the business they had built would not be able to sustain without a continued injection of external funding.

The dilemma is that there are few potential buyers and it is difficult to sell in the short term

Embracer isn't the only one to grow this way, many companies that are currently laying off employees have also taken advantage of the low interest rate environment of the 2010s to try to accelerate growth by investing to cover operating costs, only to find themselves forced to cut in the face of a less friendly investment climate. However, no other company pursues such a strategy on such a large scale as Embracer.

What will happen to the acquired studios and IPs is something that everyone is speculating about. There are no obvious buyers who want to buy the entire company, and it's worth noting that Embracer has acquired a particularly large number of European companies, and while the company's collapse would be an unusually painful disaster for the European gaming industry, potential investors like China's Tencent are bound to face intense scrutiny from the European Union if they want to bid.

The most likely outcome would be a scramble to divest the most valuable parts of a rapidly assembled portfolio, but Embracer finds itself in a market that is very scary of this activity. It bought almost all of its studios at a time when interest rates were close to zero, which made it easy for the company to raise large sums of money, and now, with interest rates at their highest levels in decades, it is selling assets in the view, making it difficult to get money for M&A (unless it's a large company with billions of dollars in deposits, and the most likely potential acquirer, Microsoft, will be digesting its last big merger for a long time to come). This situation both narrows the pool of potential buyers and depresses the potential selling price.

There is nothing optimistic about this situation. There's no doubt that Embracer's management is trying to stay afloat together, but that's the least they've been able to do after a decade of utterly reckless approach. Even in the most optimistic scenario, we are almost certain to lose a large number of studios and other companies in the industry, some of which are very important and legendary, all of which are staffed by talented people who are facing unbearable uncertainty and instability as this situation develops.

Embracer's legacy has the potential to be one of the scorched earth, especially for European game development. It's always hard to tell the truth about a company that buys studio after studio but rarely actually releases any games, but while many have tried to sound the alarm over the past decade, the lure of low-interest cash-driven mergers is too appealing for anyone to question the sustainability of the whole thing.

Unfortunately, the rank-and-file employees of the studio, which was now acquired by Embracer, will now pay the price for this strategy.

According to the 2023Q3 financial report, Embracer Group's Q3 revenue was US$1 billion, a year-on-year increase of 13%, and the net loss was US$53.18 million, a significant narrower than the US$226 million in the same period last year. Among them, the board game segment had the best performance, with revenue increasing 25% year-over-year to US$385 million, followed by PC/console games (US$370 million, down 5% year-on-year), mobile games (US$139 million, up 2% year-over-year), and entertainment and services (US$131 million, up 76% year-over-year).

The main reason for the year-on-year decline in new game revenue for PC and console was the decline in revenue from older games. According to the financial report, during the 2023Q3 period, Embracer's old game revenue was $153 million, a year-on-year decrease of 14%, but the new game revenue reached $133 million, becoming one of the best quarters for this business unit in Embracer's history.

CEO Lars Wingefors said, "We are making good progress on our restructuring project." As of September 30, 2023, the company has laid off 904 employees, of which 511 are R&D personnel (in addition, 191 employees have been laid off in external studios), meaning that the company has laid off 5% of its workforce, leaving Embracer with a total of 15,700 employees.

Embracer revealed that the main objective of its restructuring plan remains to reduce the company's net debt to at least SEK 8 billion (USD 757 million) by March 31, 2024, and its debt remains at USD 1.4 billion. However, Wingefors also noted that the company is currently focused on "improving the ROI of PC and console games."

.data_color_scheme_dark{--weui-ORANGERED: #ff6146;--weui-BG-0: #111;--weui-BG-1: #1e1e1e;--weui-BG-2: #191919;--weui-BG-3: #202020;--weui-BG-4: #404040;--weui-BG-5: #2c2c2c;--weui-FG-0: rgba(255, 255, 255, .8);--weui-FG-HALF: rgba(255, 255, 255, .6);--weui-FG-1: rgba(255, 255, 255, .5);--weui-FG-2: rgba(255, 255, 255, .3);--weui-FG-3: rgba(255, 255, 255, .1);--weui-FG-4: rgba(255, 255, 255, .15);--weui-FG-5: rgba(255, 255, 255, .1);--weui-RED: #fa5151;--weui-REDORANGE: #ff6146;--weui-ORANGE: #c87d2f;--weui-YELLOW: #cc9c00;--weui-GREEN: #74a800;--weui-LIGHTGREEN: #3eb575;--weui-BRAND: #07c160;--weui-BLUE: #10aeff;--weui-INDIGO: #1196ff;--weui-PURPLE: #8183ff;--weui-WHITE: rgba(255, 255, 255, .8);--weui-LINK: #7d90a9;--weui-TEXTGREEN: #259c5c;--weui-FG: #fff;--weui-BG: #000;--weui-TAG-TEXT-RED: rgba(250, 81, 81, .6);--weui-TAG-BACKGROUND-RED: rgba(250, 81, 81, .1);--weui-TAG-TEXT-ORANGE: rgba(250, 157, 59, .6); --weui-TAG-BACKGROUND-ORANGE: rgba(250, 157, 59, .1); --weui-TAG-TEXT-GREEN: rgba(6, 174, 86, .6); --weui-TAG-BACKGROUND-GREEN: rgba(6, 174, 86, .1);-weui-TAG-TEXT-BLUE: rgba(16, 174, 255, .6); --weui-TAG-BACKGROUND-BLUE: rgba(16, 174, 255, .1);--weui-TAG-TEXT-BLACK: rgba(255, 255, 255, .5);-weui-TAG-BACKGROUND-BLACK: rgba(255, 255, 255, .05)}.data_color_scheme_dark{--weui-BTN-ACTIVE-MASK: rgba(255, 255, 255, 255, .1)}.data_color_scheme_dark{--weui-BTN-DEFAULT-ACTIVE-BG: rgba(255, .data_color_scheme_dark{-weui-DIALOG-LINE-COLOR: rgba(255, 255, 255, .1)}} .data_color_scheme_dark{-weui-BG-COLOR-ACTIVE: #373737}.data_color_scheme_dark{-weui-BG-6: rgba(255, 255, 255, .1); --weui-ACTIVE-MASK: rgba(255, 255, 255, .1)}.rich_media_content{color:#000000e5; usayizi font:17px; font-size:var(--articleFontsize); overflow:hidden; text-align:justify}.rich_media_content{color:#ffffffa6; umbala: var (--weui-FG-HALF)}.rich_media_content {position:relative; z-index:0}.wxw-img{vertical-align:bottom}*{margin:0; ukudding:0}.rich_media_content * {max-ububanzi: 100%!kubalulekile; ibhokisi-sizing: border-box!kubalulekile; -webkit-box-sizing: border-box!kubalulekile; word-wrap:break-word!important}@media(prefers-color-scheme:dark){body:not([data-weui-theme=light]) .rich_media_content img:not(.wx_img_placeholder){filter:brightness(.8)}}body,.wx-root,page{--weui-BTN-HEIGHT: 48;--weui-BTN-HEIGHT-MEDIUM: 40;--weui-BTN-HEIGHT-SMALL: 32}.wx-root,body{--weui-BTN-ACTIVE-MASK: rgba(0, 0, 0, .1)}.wx-root,body{--weui-BTN-DEFAULT-ACTIVE-BG: #e6e6e6}.wx-root,body{--weui-DIALOG-LINE-COLOR: rgba(0, 0, 0, .1)}.wx-root,body{-- weui-BG-COLOR-ACTIVE: #ececec}body,.wx-root{--weui-FG-1: rgba(0, 0, 0, .55);--weui-ORANGERED: #ff6146;--weui-BG-0: #ededed;--weui-BG-1: #f7f7f7;--weui-BG-2: #fff;--weui-BG-3: #f7f7f7;--weui-BG-4: #4c4c4c;--weui-BG-5: #fff;--weui-FG-0: rgba(0, 0, 0, .9);--weui-FG-HALF: rgba(0, 0, 0, .9);--weui-FG-1: rgba(0, 0, 0, .5);--weui-FG-2: rgba(0, 0, 0, .3);--weui-FG-3: rgba(0, 0, 0, .1);--weui-FG-4: rgba(0, 0, 0, .15);--weui-FG-5: rgba(0, 0, 0, .05);--weui-RED: #fa5151;--weui-REDORANGE: #ff6146;--weui-ORANGE: #fa9d3b;--weui-YELLOW: #ffc300;--weui-GREEN: #91d300;--weui-LIGHTGREEN: #95ec69;--weui-BRAND: #07c160;--weui-BLUE: #10aeff;--weui-INDIGO: #1485ee;--weui-PURPLE: #6467f0;--weui-WHITE: #fff;--weui-LINK: #576b95;--weui-TEXTGREEN: #06ae56;--weui-FG: #000;--weui-BG: #fff;--weui-TAG-TEXT-RED: rgba(250, 81, 81, .6);--weui-TAG-BACKGROUND-RED: rgba(250, 81, 81, .1);-- weui-TAG-TEXT-ORANGE: #fa9d3b;--weui-TAG-BACKGROUND-ORANGE: rgba(250, 157, 59, .1);--weui-TAG-TEXT-GREEN: #06ae56;-weui-TAG-BACKGROUND-GREEN: rgba(6, 174, 86, .1); --weui-TAG-TEXT-BLUE: #10aeff;-weui-TAG-BACKGROUND-BLUE: rgba(16, 174, 255, .1);-weui-TAG-TEXT-BLACK: rgba(0, 0, 0, .5); --weui-TAG-BACKGROUND-BLACK: rgba(0, 0, 0, .05)}body,.wx-root{--weui-BG-6: rgba(0, 1 0, 0, .05); --weui-ACTIVE-MASK: rgba (0, 0, 0, .05)}@media(prefers-color-scheme:dark){.wx-root:not([ data-weui-theme=light]),body:not([data-weui-theme=light]){--weui-ORANGERED: #ff6146;--weui-BG-0: #111;--weui-BG-1: #1e1e1e;--weui-BG-2: #191919;--weui-BG-3: #202020;--weui-BG-4: #404040;--weui-BG-5: #2c2c2c;--weui-FG-0: rgba(255, 255, 255, .8);--weui-FG-HALF: rgba(255, 255, 255, .6);--weui-FG-1: rgba(255, 255, 255, .5);--weui-FG-2: rgba(255, 255, 255, .3);--weui-FG-3: rgba(255, 255, 255, .1);--weui-FG-4: rgba(255, 255, 255, .15);--weui-FG-5: rgba(255, 255, 255, .1);--weui-RED: #fa5151;--weui-REDORANGE: #ff6146;--weui-ORANGE: #c87d2f;--weui-YELLOW: #cc9c00;--weui-GREEN: #74a800;--weui-LIGHTGREEN: #3eb575;--weui-BRAND: #07c160;--weui-BLUE: #10aeff;--weui-INDIGO: #1196ff;--weui-PURPLE: #8183ff;--weui-WHITE: rgba(255, 255, 255, .8);--weui-LINK: #7d90a9;--weui-TEXTGREEN: #259c5c;--weui-FG: #fff;--weui-BG: #000;--weui-TAG-TEXT-RED: rgba(250, 81, 81, .6);--weui-TAG-BACKGROUND-RED: rgba(250, 81, 81, .1);-- weui-TAG-TEXT-ORANGE: rgba(250, 157, 59, .6);--weui-TAG-BACKGROUND-ORANGE: rgba(250, 157, 59, .1); --weui-TAG-TEXT-GREEN: rgba(6, 174, 86, .6); --weui-TAG-BACKGROUND-GREEN: rgba(6, 174, 86, .1);-weui-TAG-TEXT-BLUE: rgba(16, 174, 255, .6); --weui-TAG-BACKGROUND-BLUE: rgba(16, 174, 255, .1);-weui-TAG-TEXT-BLACK: rgba(255, 255, 255, .. 5); --weui-TAG-BACKGROUND-BLACK: rgba(255, 255, 255, .05)}}@media(prefers-color-scheme:dark){.wx-root:not([data-weui-theme=light]),body: non([data-weui-theme=light]){-weui-BTN-ACTIVE-MASK: rgba(255, 255, 255, .1)}} @media(prefers-color-scheme:dark){.wx-root:not([data-weui-theme=light]),body:not([data-weui-theme=light]){-weui-BTN-DEFAULT-ACTIVE-BG: rgba(255, 255, 255, .126)}}@media(prefers-color-scheme:dark){.wx-root:not([data-weui-theme=light]),body:not([data-weui-theme=light]){-we rgba(255, 255, 255, .1)}}@media(prefers-color-scheme:dark){.wx-root:not([data-weui-theme=light]),body:not([data-weui-theme=light]){--weui-BG-COLOR-ACTIVE: #373737}}@media(prefers-color-scheme:dark){.wx-root:not([data-weui-theme=light]),body:not([data-weui-theme=light]){--weui-BG-6: rgba(255, 255, 255, .1);--weui-ACTIVE-MASK: rgba(255, 255, 255, .1)}}@media(prefers-color-scheme:dark){body:not([data-weui-theme=light]).appmsg_skin_default.rich_media_empty_extra{background-color:#191919}}@media(prefers-color-scheme:dark){body:not([data-weui-theme=light]).my_comment_empty_data{background-color:#111}}.rich_media_content p{clear:both; min-ukuphakama: 1em} td p {margin:0; root{--sab:0}:root{--articleFontsize: 17px}:root{--sab: env(safe-area-inset-bottom)}:root{--wxBorderAvatarRatio: 3}:root{--discussPageGap: 16px}:root{--appmsgPageGap: 20px}