GPWA Times Magazine - Issue 34 - February 2016

A problem merged is a problem halved? While mergers and acquisitions may increase total revenue numbers, they don’t fundamentally alter the challenges iGaming businesses face. By Lorien Pilling J ust over 10 years ago, in the heady days of Nov. 2005, PartyGaming had all the swagger of someone whose name had just been added to the VIP guest list for the hottest club in town. After a success- ful IPO earlier that summer, PartyGaming was about to be elevated to the FTSE 100 – the index of the U.K.’s largest publicly traded companies – with a valuation of almost £5 billion. How things change. A decade later, PartyGaming found itself involved in a sort of “Buy one, get one free” discount offer with bwin for around £1 billion, being squabbled over by GVC and 888. From £5 billion to £1 billion is what the City would no doubt dress up as “negative value creation.” It’s a fat, stink- ing loss to the rest of us. From that high point in Nov. 2005, the cards ran against PartyGaming. Less than 12 months later the UIGEA was passed in the U.S., and the company was forced to switch off most of its players. PartyGaming then turned its attention to Europe but was competing with poker rooms that were still taking revenues from the U.S., which they could use to out-muscle PartyGaming on marketing in the European markets. PartyGaming tried to replicate the success of poker with the likes of PartyGammon (backgammon) and PartyBets (sports betting) but never really made an impact. History could have been different if PartyGaming had not been listed on the stock market. Had it remained private, no one would have realized how much money it was making in the U.S., and the UIGEA might not have been implement- ed when it was. After the UIGEA, as a pri- vate company, PartyGaming might have had the option of trying to stay in the U.S., as PokerStars did. The reality was that by 2010, PartyGaming profits were down to $44 million and both it and bwin were under pressure from a variety of sources. Despite recording large revenues, bwin had always struggled to convert those revenues into sustained, meaningful profits. On the face of it, a merger between the two companies made sense. It would create a large market- leading entity, seemingly with expertise in both sports betting and gaming. The perfect all-round combination? But at the time the merger was announced, Global Betting and Gaming Consultants (GBGC) wrote the following: “The effect [of the merger announcement] was to cause a shudder through the online gambling industry at the prospect of com- peting against such a large company that could bring further resources to marketing and economies of scale that could leverage 20% growth on Day One. Fear not. Divorce rates vary, but in the West, about half of all marriages fail. According to the Harvard Management Update, most mergers fail to add sharehold- er value. Indeed, two-thirds of the newly formed companies perform well below the industry average. Perhaps more worrying for the sharehold- ers and the management of both companies is that a ‘death cross’ has appeared in the financial charts of both companies. A death cross occurs when the 50 day moving av- erage crosses the 200 day moving average. Such a move normally precipitates a fall in value, sometimes as much as 30%. The fundamentals are not looking good. Both companies are spending increasing amounts on marketing without the return to EBIT.” As predicted, the merger has not been a success. The revenues and profitability of the combined business are no greater than what bwin was posting before the deal. But the very factors that were causing hardship for bwin.Party were also helping GVC Holdings grow its business. The process of iGaming regulation in Europe from 2010 onward was causing both consolidation and an assessment about whether to keep trading in “gray” markets. GVC Holdings was prepared to continue operating in some markets where others were not. The company had already purchased Sportingbet’s Turkish operations before its acquisition of the rest of the company in partnership with William Hill. GVC took the parts of the Sportingbet business that WilliamHill did not want. This attitude toward regulated and un- regulated gambling markets was one reason GVC’s bid was initially thought to be weaker than 888’s. How could GVC’s stance sit with bwin.Party’s decision to focus on locally regulated markets? But bwin’s CEO Norbert Teufelberger has apparently reconciled this issue. He told eGaming Review , “It is very clear that oper- ators able to manage a different regulato- ry risk profile have seen superior growth in the past three years. That cash flow can then be used to invest in growth in nation- ally regulated markets. So now we have the option to play with that.” The GVC deal is just one of many seen in 2015. The catalyst has been the introduc- tion of a point of consumption (POC) tax on Internet gambling in the U.K. It is clear 39 A problem merged is a problem halved?