Tencent Is Reportedly Shifting Its M&A Strategy to Majority Deals

Alessio Palumbo
Tencent

Tencent, one of the biggest tech companies in the world and the largest by gaming revenue, has long invested in companies based outside of China. However, it often did so in a limited fashion, only grabbing a minority stake and letting existing owners stay on to lead their companies.

Examples include Playtonic Games, Frontier Developments, Bohemia Interactive, Payload Studios, Offworld Industries, Triternion, Paradox Interactive, Remedy Entertainment, Krafton, Kakao, FromSoftware, Marvelous, Bloober Team, and Don't Nod.

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Today, a new Reuters report suggests there is going to be a shift in Tencent's merger and acquisition strategy to focus on majority deals instead. The reason for the policy change is well-known: the Chinese government's increasingly harsh restrictions on gaming (especially for minors) have forced Chinese companies, including the likes of NetEase, to look outward for growth. In August 2022, Tencent had to report its first-ever decrease revenue drop measured at -3% on a year-over-year basis when compared to the second quarter of 2021. The drop for the whole first half of 2022 was -1%.

The Chinese giant recently completed a sizable ($300 million) investment in Guillemot Bros., the family-owned company with the largest stake in Ubisoft. Tencent also received authorization from Ubisoft's Board of Directors to increase its existing direct stake in the company from 4.5% to 9.99% of capital or voting rights. As part of the deal, Tencent won't be able to sell its Ubisoft shares for five years and won't be able to increase its stake in the company for eight years.

Truth be told, it's not like Tencent didn't do any full-fledged acquisitions or majority stake deals before. It already happened with 1C Entertainment (now Fulqrum Games), Inflexion Games, Wake Up Interactive, Turtle Rock Studios, Sharkmob, Grinding Gear Games, Supercell, Leyou, 10 Chambers Collective, Klei Entertainment, and Tequila Works.

In all these cases, Tencent acquired the majority or the entirety of the shares outright. In other cases, such as with Yager Development, Fatshark, Sumo Group, Riot Games, and Funcom, an initial minority investment was followed by a more substantial operation to secure the control of these companies. As such, the only thing that sounds like it will change is Tencent just not bothering with the middle step any longer and going directly for majority deals. Either way, the gaming industry's wave of consolidation seems to be far from over.

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