How Leyou can benefit from the acquisition by Tencent

Could Leyou acquired by Tencent be a win-win deal? – 5G cloud gaming stocks that will benefit

As rumors surfaced surrounding the acquisition of Leyou Technologies Holdings Ltd (SEHK: 1089) by Sony Corp (TYO: 6758), it became clear that at the beginning of July Leyou has been in exclusive talks with the gaming giant, Tencent Holdings (SEHK: 700) about a potential M&A deal.

While it doesn’t strike many investors as a surprise, given the acquisitive nature of Tencent, many have been thinking about what kind of synergies or benefits Leyou can get out of this deal.

In this article, I will look into the implications of this transaction to both Tencent and Leyou.

Leyou’s background

Leyou currently owns a few subsidiaries of game development studios. Amongst them, the more well-known ones are Dirty Bomb, developed by Splash Damage, and Warframe, developed by Digital Extremes. Its expertise lies in developing free games for console and PC markets.

At the beginning of July, the company confirmed that its largest shareholder has been in an exclusive discussion with Tencent about a potential acquisition. The decision will likely be made at the end of July.

Leyou halted trading on 9th July as it confirmed that it has been in talks with Tencent. Upon the resumption of its trading on 13th July, its share price jumped by around 10%.

How can Tencent benefit?

Tencent’s gaming business focuses on mobile games since its core business is built around mobile applications. Its home market China also has a sophisticated mobile gaming industry, especially compared to other oversea markets.

As Tencent looks to cement its position as a leader of the world’s gaming industry, it needs to beef up its presence and game offerings in the console and PC segments that still dominate the gaming market overseas.

That’s why it looks to Leyou, whose gaming studios and expertise can strengthen and complement Tencent’s current game offerings very well.

Synergies for Leyou

The synergy between Tencent and Leyou can work to benefit both firms mutually.

Game development requires a great amount of financial resources, and one cannot expect immediate returns in the initial stages. As the gaming market becomes more saturated and competitive, developers are under pressure to produce blockbusters for the users.

For Leyou, the solid financial backing from Tencent allows it to focus more on game development and less on the fund-raising part. It also allows Leyou to take more risks in the development process and innovate.

On the other hand, Tencent’s mobile expertise can convert Leyou’s products in order to tap into the mobile game players in mainland China.

In fact, Tencent managed to develop the mobile version of the game PUBG (after its investment into the Korean game developer, Bluehole) and launched it in the mainland Chinese market, which made PUBG one of the most popular games in the world.

Now with Tencent’s acquisition, Leyou’s many games can well be the next PUBGs.

Foolish conclusion

Leyou’s share price movement indicated that this transaction has been viewed quite positively by the market.

After all, without Tencent being in the picture, Leyou’s games can hardly be the next PUBG. It has a chance now. As the old saying goes – if you can’t beat them, join them.

More reading

This contributor currently holds shares in Tencent Holdings (SEHK: 700).

The Motley Fool Hong Kong Limited( 2020

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