Literature review
This chapter introduces theories that formulate the
foundation of the thesis. It highlights core theoretical principles and
assumptions that inform the empirical analysis. The first two chapters
introduce literature on mergers and acquisition research and efficient market
hypothesis. The chapters form the foundation for the applied method and
elaborate on assumptions and theories backing the method. The subsequent two
subchapters present the characteristics of the gaming industry to analyse the
result. The last subchapter summarizes academic theories and analyses
M&A growth opportunities and challenges.
Background on Merge and Acquisition
Fundamentally, the terms mergers and acquisition are
utilized interchangeably; however, some differences are quite salient. A merger
is a combination between two, in most cases smaller size, enterprises and
organizations. In a narrow view, it is a friendly transaction where top-level
management in each organization seeks the shareholder's organization's approval
to partake in decision-making. The deal is negotiated within an elongated
duration since there is a deep consideration of different company structures
and philosophies. On the other hand, acquisitions can be defined as a hostile
process enforcing the absorption of another company that ceases to exist after
the process. Therefore, acquisition undertakings are referred to as
mergers even though it is debatable (Majaski, 2020). According to Moeller &
Brady (2014), M&A is central to the global strategic and financial business
landscape. There is a strong correlation between the transactions and the
natural evolution of organizations. Furthermore, there are powerful mechanisms
to foster cooperative growth when operating in a conducive environment. For
many investors, the assumptions are that such deals create value for companies
underscoring the value creation aspect although the outcome can be different.
There exists a myriad of reasons for involvement in
M&A activities as well as how they are grouped differs significantly
between the authors. Trichterbon et al., (2016) argue that prior M&A
experience impact positively on its general performance. They hypothesize and
indicate that the M&A function, a segregated dedicated company department,
rapidly enhances merger and acquisition performance. The department functions
as the centre of all the M&A-related information and critically makes them
proactive instead of reactive in M&A deals. Furthermore, it facilitates
nursing prerequisite learning mechanisms and equips the M&A process with
the necessary experience and capacity.
According to Aloke Ghosh (2001) in his study, his
argument points out the vast majority of value creation found in the previous
merger an acquisition researcher was biased. He argues that since the companies
engaging in M&A are from a period of above-average profit they are
therefore incomparable to the mean of the market but to the threat of the
matching organization. In his study, he did not explore how merging firms were
in a position to balloon cash flow after the merger. He did however conclude
that in situations when cash was utilized as payment after the merger, there
was an increment of cash flows.
Efficient market hypothesis
The efficient market hypothesis theory (EMH) also known
as Random Walk Theory was created by Eugene Fama in the 1960s. The theory
is pegged on propositions that the prevailing price of stocks reflects on every
available information at the moment such as the value of the firm (Glimne et al., 2021). It deals with the fundamentals in finance on
the reason for the changes in prices in security markets and the way changes
are occurring. It purports that there is a high degree of complexity in dealing
with the market consequently, risk is adjusted using the market available
information since the information is available to all parties and they are
expected to make decisions based on it immediately. Berk et al., (2017) stated
that security with equal risk should reciprocate returns, however, the
statement is considered incomplete since the non-existence of the definition of
equal risk. And because people from different backgrounds have different
opinions and beliefs, they have differing judgements on riskiness.
The EMH argues that profiting from the act of
predicting price movements tends to be complex and not likely. Thus, the
fundamentals of price changes are the introduction of new information. A market
is classified as efficient if there are prompt price adjustments without
inclining towards price information (Ţiţan, 2015).
The outcome thus is on the prevailing prices of securities having a reflection
of information in entirety at a specific juncture. Furthermore, with all
consideration factors, there is no reason to believe the prices are either
unprecedentedly high or low. In other words, the security price adjustment
occurs before an investor trades or makes a profit using new information.
The significance of an efficient market is due to
high-intensity competition among investors ready to generate profits from the
availability of new information. Precisely, the ability to figure out under and
overpriced stocks is imperative (Clarke et al., 2001). Consequently, many people spend a considerable amount of time and
capital in the effort to detect wrong-priced stocks. Thus, naturally, as
many of the analysts compete against each other the effort to exploit each
other of over or -valued securities and the likelihood of the ability to find
and capitalize on such mispriced securities diminishes. Understandably,
in equilibrium, only a relatively small percentage of the analysts will be able
to profit from the exploitation of mispriced securities, mostly in an expected
way (Ţiţan,
2015). For many investors, the
information analysis payoff has the highest chance of not outweighing the
transaction costs.
The most salient implication of the EMH can be
stated in the form of a slogan: To begin with is ‘Trust market prices’ at a
given time, prices of securities in a market that is working correctly reflect
all the available information to investors. Consequently, there is no
opportunity for double-playing investors and therefore the outcome is that all
investments in a market that are working efficiently are ‘fully priced’ which
is normal because the investors are getting exactly what they have spent money
on (Clarke et
al., 2001). However, the
fair pricing of all securities will not that the performance of all will be
equal, similarly, the chance of rising or falling in price is expected to be
fairly for all securities. Thus, according to the capital markets theory, the
expected outcome from security is a fundamental function of its risk. It
is worth noting that the price of the security reflects the current price value
of the expected cash flows shortly and it involves various factors that include
but are limited to volatility, liquidity as well as the risk of going bankrupt.
Nevertheless, while the prices are rated in terms of rational, the expected
changes in prices are supposed to be random and out of range of predicting
since it is classified as new information using its very nature and it should
be unpredictable. In a nutshell, stock prices are opinions to follow a random
walk. Based on these findings, the report would like to test whether the hypothesis
the report would like to test so that it can determine the importance of EMH in
developing theoretical on the merger and acquisition
Hypothesis (i)
EMH is claiming
that no new information is used in making M&A decisions and is reflected in
the market prices. But it can be observed the time is fluctuating all the time,
thus EMH is incorrect.
Gaming industry and M&A
The gaming industry is in the midst of a period of rapid
growth and diversification. The worldwide games market as of 2021 has
generated $ 175.8 billion, however, despite the slight decline in revenue
generation the market was poised to generate more than $ 200 billion within 4
years. The growth of the market is majoring attributed to the prevalent
adoption of mobile devices, the increasingly widespread female gamers and also
the democratization of the accessibility of gaming via cloud-based services. In
the contemporary world, while digital content and subscription-based models are
gaining popularity there is still a significant percentage of the market for
physical games and hardware upgrades. Consequently, as the gaming industry
continues to develop, evolve and attract a diverse range of players, the
investors need to have profound insights to facilitate their understanding and catering
of specific preferences and needs of underserved audiences.
Thus, considering the developing nature of the gaming
industry, there are few academic research work that instigate value creation,
especially in the media and entertainment industry covering the gaming
sub-sector. However, there are various studies available. Markus Schiefs's
(2013) research work titled “Business Models in the Software Industry “defines
the business model traits and their impact on the company and M&A
performance. By classification, the outcome reflects the current situation in
other sectors. He argued that the value added to the acquired company is
positive and, in most cases, there is considerable emphasis that organizations
are ready to pay high premiums to seize technological opportunities. The
information for company acquisition however is not conclusive. Consequently,
Schief in his findings came up with three characteristics of positive M&A
performance for the acquirer. The market seems to have a positive reaction to
what he terms software companies that are majoring in application software, the
software firms that are utilizing M&A not as an initial source of
innovation for the updating of their portfolio and M&A events from an
organization based in the consumer software sector.
The thesis study by Tatiana Abromava “Stock price
reactions on M&A, Dividends and Game Releases. Evidence from Gaming
Industry (2013)” researched 55 M&A pronouncements in the gaming industry
sector for five years starting from 2008. The study found that the events
positively impacted the CAR of the acquirer and the organization being
acquitted stock prices and that the process of buying a near stake in a company
affected positively the acquirer's stock during and after the event
duration. the increasing change in dynamics of the gaming industry is
driven by innovation and lucrative virtual products and convinced the investors
to seek M&A-driven growth opportunities within the sector. Thus, the
strategic decisions to exploit the opportunities and be profitable may be
through a combination of companies, the acquisition of profitable iPs to seek
loyalty; gaining a customer base, or whether the acquisition will be central in
enhancing the human capital a talent pool within the organization. Based
on these findings we will conduct regression analysis to ascertain the
hypothesis below.
Hypothesis
Hypothesis (ii); the Acquirers in the gaming industry are
exposed to more favourable conditions compared to the rest in the music and
entertainment industry
Characteristics of gaming industry
According to Marchand et al., (2013), the gaming and software
turnover are cyclically attached to the hardware that they used for their
operations. It means that a new console is needed when games are sold and
thus many people will have the get a new console until it reaches the peak
before starting to experience a decline while waiting for the arrival of the
new generation of consoles. Furthermore, their study argues that the demand for
gaming has been taking significant market share and it may impact the wellbeing
of video gaming sales. Matt Gardner (2020) states that the gaming industry is
expected to experience a new level of growth for the next half a decade but it
is not attributed to the gross sales revenue of the next generation consoles
such as PlayStation 5. Instead, the growth of the revenue in gaming sales is
expected to be the result of mobile and cloud-based gaming.
Leverage
The impact of leverage as for the time of
M&A announcement, various studies have found it has impacted negatively on
the company’s leverage on the chances of success in the process of completing
acquisition even when operating under favorable conditions. Harrison et al.,
(2014) that companies with higher leverage tend to possess fewer resources that
are prerequisites in value creation including post-announcement undertakings,
which are generally a high-cost activity with the ability of adverse effects
that may be not correct under specific debt agreements. Their study also found
that a trading strategy that shorts acquirers with unprecedented levels of
leverage and purchasing rivals of those companies results in considerable
positive buy-and-hold high-level returns of at least 35% over 2 years after the
acquisition announcement. Also, Jankowitsch et al., (201) indicate that even
though the increased risk of debt utilized in financing the acquisition in a
situation where the acquirer is highly leveraged at the time of the
M&A announcement, the bonds of such a company tends to surpass the
performance of bonds of acquirers with lower leverage, nonetheless both of
their returns are not positive. Cardoso's (2020) study employs dummy
variables to aid in expressing the levered nature of the acquirers and their
targets. The outcome of the study stressed that “results that pointed a
‘negative and statistically significant at the1%and 10% level”.
Nevertheless, the study further indicates that long-term variations, become
weak drastically indicating that there is more than one factor such as the
‘management quality and macroeconomic context’. That addresses various
post-merger performances.
Stakeholder performance implications
The theoretical framework based on the stakeholder
theory level is that management and organizations are not only mandated to
create the best resources for their investors but need to have a panoramic view
of the interests of the customer base, and suppliers inter alia to maintain
success in the long run. The theory is the result of the necessity for managers
to deal with the ever-evolving business environment and the quest to have a
broad framework that looks beyond the interests of the stockholders (Clarke
et al., 2001). In other words, it was designed to have a deep
comprehension of the needs of all parties involved who in one way or another
could affect the success of the company’s objectives and goals. The
implementation is through actively managing the relationship and the
surroundings regarding and revolving around the business.
The extensive studies regarding the implications
of M&A result in mixed outcomes on the advantages of M&A on outcomes
for the acquirers. According to Rau et al., (1998), the Acquirers and the
company may be disadvantaged by overpayment, while the target company
shareholder may benefit from a short period, although some researchers are
claiming that the question remains unanswered. Agrawal et al (1192) in their deep
research teaching Jensen et al., (1983) findings, tried to
determine the EMH, which argues that M&A should be profitable for
shareholders, the findings remained unsolved, the findings that the acquirers
and the firm are estimated to be losing at least 10% of their market value in
the 5 years after M&A announcement instead of gaining. Another research
work, utilizing a control group of non-acquired organizations concluded that
after an M&A announcement the performance for both non-acquired and the
ragged firms is akin. the acquiring firm shareholders among the rest tend to
benefit less or experience similar returns that the returns are neutral since
they incur the entire cost of acquisition, the issue of interaction and the
serving debt.
Growth Opportunities
Since there are low entry barriers, there are
many game publishing companies making their entry into the market but many are
struggling to reach the point of break-through. According to data from Statista
(2016) close to 19000 games were released in the market at the beginning of
2016. Thus, for most of these companies to have a future they must either be
acquired or forced to exit the market due to a high level of competition.
Further, since game technology is rapidly developing and competition is
becoming stiffer, the cost of game production has also been increasing.
For big companies, it may become more profitable through the acquisition of
small potential companies rather than engaging their developers to develop a
game from scratch. Consequently, the amount of media time and consumption via
the video industry has gained steady momentum in recent times since large
companies have created a tendency to acquire games to increase their
intellectual properties and practice business diversification. For instance,
Disney organization acquired social game development firm Playdom I in a
deal worth $ 762 million whereas Warner Bros Home Entertainment purchased
“Rocksteady and Studios” and “Midway Games”.
Challenges and risks in the gaming industry
Despite a myriad of successful cases in gaming
industry M&A, the deals also faced numerous challenges and risks. They
include but are not limited to integration issues, cultural issues and the
overestimation of the synergies. For example, Blizard’sacquistion of King
Digital Entertainment faced the challenge of integration, and in return, it
impacted negatively on the anticipated synergies and financial
performance. Consequently, the gaming industry's foundation is based on
technology. Technology is increasingly evolving at a faster pace and
therefore it is upon the firms to keep up with the pace. The fast-paced nature
of the gaming industry means that the technological obsolesce and frequent
shifting of customer preferences can result in the eroding of the value of the
acquired firms and results in losses to the acquirer shareholders.
Thus, the acquirers must mitigate the risks to realize sustainable value
creation.
Post merger
transition may result to conflict-of-interest regarding the organization
culture. The merger and acquisition mean that new employees from the acquirer company
come with a different culture that may conflict with the already existing
culture. If the situation is not well
addressed it may lead to dwindling of performance post the M&A. therefore,
the acquirer company must be interested in the organizational culture and how
to deal with it. The interest is pegged on how the organizational culture may
evolve o change since there is adjustment in the human capital and in most
cases replacing the existing employees.
Summary
The literature
on the gaming industry M&A used the EMH theoretical approach to build
argument on M&A. therefore, using the empirical findings the
report nexus is capturing of new findings. The report extensively covered
gaming industry and the implications of its characteristics. The employment of
leverage, challenges and opportunities provide the report with strong
foundation to testing its hypotheses.
References
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