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Why Square Enix Sold Its Western Studios

Square Enix recently sold most of its Western studios and properties to the Embracer Group, signaling a big change in how it does business.


The gaming industry can't seem to go a month without big acquisition news, but the most recent of these was surprising for a different reason. Square Enix suddenly sold all of its Western studios--Crystal Dynamics and Eidos--to the Embracer Group. That includes high-profile franchises like Tomb Raider and Deus Ex. The move largely exits Square Enix from Western-made games, trimming its sails with an apparent focus on its own internal Japanese development. Analysts tell GameSpot that the move is somewhat of a "head-scratcher" financially, but ultimately suits its long-term goals of slimming down the organization and pursuing new revenue streams.

Lewis Ward, gaming research director at IDC, says that Square's revenue growth and profits were decent over the last nine months, which may have prompted the company to sell "most of the crown jewels." But then, he says, the sale price was surprisingly low if that's the case.

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"The problem I have with this scenario is that $300 million for a company that generated well over $2.4 billion last year doesn’t feel like a great haul at all," Ward said. "If Embracer was throwing tons of money their way it would make sense to sell in this heightened M&A atmosphere, but $300 million strikes me as a price tag for a highly-distressed company given their recent revenue results. It’s closer to Activision’s proposed buyout by Microsoft from this perspective. So there must be more to the story that I just know about that helps explain it. It’s a bit of a head-scratcher."

Piers Harding-Rolls, who runs games research at Ampere Analysis, sees this as a way to slim down the company as it pursues some of its long-term goals, and its other investments may have made it that much more eager to sell these assets.

"Square Enix has been seeking to offload this part of its business to restructure and focus its investments," Harding-Rolls said. "It has struggled to get consistent commercial success out of those studios, and it wants to build a leaner organization with a more compelling growth and profit story for its shareholders.

"Setting aside the long term growth engines it has identified--AI, cloud and blockchain--this makes Square Enix more financially robust as a games business today. Considering the pipeline investments it was faced with making AAA games from these studios over the next five years, it was probably keen to sell considering its priorities. This will inevitably mean some reorganization in the Western offices which has responsibilities across all SE titles in Europe and North America."

Square Enix has said that the sale will be used to invest in the blockchain, among other things. Meanwhile, Ward suggested this was a larger move toward Square Enix recentering itself on its home turf. "It sounds like Square is pulling back from international development efforts and refocusing on the output of its Japanese studios," he said. "I think we have to assume they lost tens of millions of dollars on Marvel's Avengers in particular. This sale of Crystal Dynamics and Eidos-Montréal may be read as a white flag on their recent forays into licensed Marvel content since both those [studios'] games apparently fell short of their sales targets last year."

One reason the sale may not be a huge surprise is that for much of the last decade, Square Enix had developed a reputation for public statements indicating that its Western releases had underperformed. It made such comments regarding Tomb Raider, Marvel's Avengers, Guardians of the Galaxy, and its mobile games division, among others. While Square Enix never detailed its exact projections to gauge how much these various efforts fell short, it was understood that the company was not pleased with its Western investments.

Meanwhile, this only makes the portfolio larger for the Embracer Group, the company that is quickly buying its way into being a mega-publisher with tons of high-profile properties.

"I thought Tencent had been on an M&A tear until I reviewed the Embracer Group’s appetite for game studios in recent years!" Ward said. "I just suspect they’re super bullish on gaming’s growth in the next several years and so they’re being aggressive in buying up studios that they believe have a solid pedigree and, presumably, have some interesting projects in the works.

Harding-Rolls said that Embracer has put itself into a good position to make more than its investment back, though it may take some time for that return-on-investment to arrive depending on the state of current projects.

"Embracer faces substantial investment in these studios over a number of years before seeing any significant ROI, but it has also added a strong collection of IP and franchises with potential future value that could easily eclipse the $300m invested if successful," Harding-Rolls said. "There is upside but investment risk associated with that. The lack of service game expertise, Marvel’s Avengers aside, will have counted against the negotiated price."

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