Hong Kong: People with direct knowledge of the matter say that Tencent is changing its mergers and acquisitions (M&A) strategy to focus more on buying majority stakes in mostly overseas gaming companies. This is because the tech giant wants to grow internationally to make up for the slowing growth in China.
Tencent Holdings Ltd. has put money into hundreds of new businesses over the years, mostly in the onshore market. It has usually bought small parts of companies and stayed invested as a passive investor.
Four people with direct knowledge of the situation told Reuters that the company is now trying hard to get majority or even controlling stakes in overseas targets, especially gaming assets in Europe.
The biggest gaming company in the world by revenue made the change because it wants to grow in global markets, which means it needs a strong portfolio of games that are at the top of the charts.
Related: After the deal with Tencent, Ubisoft’s CEO says the company is still open to working with other companies.
Tencent’s new strategy shows how China’s tech giants want to come out of the regulatory shadows after two years of crackdowns and uncertainty that hurt their sales at home and caused their stocks to drop a lot.
One of the sources and another source with direct knowledge of the situation said that Tencent is also looking to buy global assets related to the so-called metaverse, especially in Europe.
Because the information was private, the people didn’t want to be named.
Tencent told Reuters that the company had been investing abroad for a long time, “long before any new rules” in China. It looks for “innovative companies with talented management teams” and lets them grow on their own, the company said, without going into more detail.
Three of the sources said that Tencent is trying to get a bigger stake in gaming companies at the same time that other tech giants like Microsoft (NASDAQ:MSFT), Sony (NYSE:SONY), and Amazon (NASDAQ:AMZN) are buying up gaming assets and related intellectual properties.
James Mitchell, Tencent’s chief strategy officer, said on a call after the company’s earnings report in August that the company would continue to buy up new game studios abroad.
“Our plan for the game business is to focus on improving our skills, especially on the international market,” he said. “We will keep buying up game studios outside of China at a very high rate.”
Pursuit of bigger stakes
Tencent is putting more and more attention on assets and markets outside of China. This is in stark contrast to how slowly it makes deals at home since regulations have tightened and it has sold off a number of domestic portfolio companies.
Refinitiv data shows that from 2015 to 2020, the owner of China’s most popular messaging app, WeChat, will make 150 investments in China worth $75 billion. This is compared to 102 deals worth $33 billion in overseas markets.
Tencent’s revenue fell for the first time ever in the third quarter, which ended in August. A lack of game approvals in China and rules that limit playing time hurt the company. Both at home and abroad, online game sales dropped by 1%.
Its shares that are traded in Hong Kong have dropped by about 60% in the last two years.
In light of this, Refinitiv data show that Tencent hasn’t invested much in China this year, but has made 27 deals worth $3 billion outside of China. Sources told Reuters that it has been reducing its portfolio in part to make regulators happy and in part to make a lot of money.
Citi analysts said in a report that came out at the beginning of September, “We think Tencent will continue to make reasonable investments to get good gaming content and talent and to deepen partnerships with top-tier studios around the world so that it can invest more and be more present in overseas markets.”
Four sources said that if Tencent went after bigger stakes in its existing gaming portfolio or new targets, it would give the company a bigger say in the businesses of those companies and help it get the intellectual property rights to popular games.
Also, Beijing is very strict about approving games in China and has put a hold on approving games with foreign intellectual property (IP). This means that Tencent has to move toward getting control of foreign game companies and their IPs, said the four sources.
Tencent raised its stake in Ubisoft in September, which made the Chinese company the biggest shareholder in the top French game developer. Tencent now owns 11% of Ubisoft, which can be raised to 17%.
Hub in a Region
The Ubisoft deal comes after Tencent, which has a lot of money, bought Copenhagen-based Sybo Games in June, which made the popular mobile game Subway Surfer, and bought a 16.25% stake in Japan-based “Elden Ring” developer FromSoftware in August.
Tencent said last year that it would buy the British video game company Sumo in a deal worth $1.3 billion. This was one of its biggest deals with a foreign company since regulators started cracking down in late 2020.
Related: Tencent weighs on Hong Kong’s stock market as a result of Japan’s positive GDP growth.
Aside from buying a majority stake in “Clash of Clans” maker Supercell for $8.6 billion in 2016, Tencent has mostly done minority deals in Europe for years, like buying 9% of British game company Frontier Developments.
Tencent also wants to invest more and do more business in Southeast Asia, where 650 million people live, because it thinks the area could have the same kind of success as China’s Internet boom, two of the sources said.
The biggest social network company in China already has a hub for Southeast Asia in Singapore, where its international game publishing business is based.
Since last year, the company has said over and over that it wants 50% of its gaming revenue to come from outside of China, up from about 25% now. In December, it started a new publishing brand in Singapore called Level Infinite.
