Game On? CFIUS Clears Chinese Video Game Acquisition
Video games have been a hot sector for deal-making recently. As the recent Microsoft/Activision Blizzard and Sony/Bungie deals make headlines around the world, investors should keep in mind that gaming transactions frequently have foreign investment review implications.
Tencent is a notable example, as the company has been the target of numerous CFIUS reviews over recent years for its overseas acquisitions. In December, CFIUS cleared the Chinese multi-national’s acquisition of British gaming studio Sumo Group. Sumo and Tencent had notified investors of the CFIUS investigation last October. Tencent also holds 100% of Riot and roughly 40% of Epic Games, and has been in negotiations over those holdings after CFIUS called those transactions in post-closing. Though Tencent reportedly takes a passive role towards many of its investments, the Riot and Epic holdings offer control over some of the biggest gaming titles worldwide, including League of Legends and Fortnite. Tencent’s gaming portfolio also includes shares of Activision Blizzard and Roblox in the United States; Klei Entertainment in Canada; and Yager Development in Germany. More recently, Tencent acquired Slamfire, whose subsidiary Turtle Rock is best known for its zombie shooter Left 4 Dead. In social media, Tencent also owns stakes in Reddit, Discord, and Snap.
CFIUS’s clearance of Tencent/Sumo demonstrates that CFIUS review is not necessarily fatal for Chinese investments in companies with access to personal data, as we explained in our post in December 2021 concerning the acquisition of data marketing company Spigot by China’s Genimous. Nevertheless, the legal and political terrain for technology transactions remains precarious. On 27 December, the period for public comment ended for ongoing rulemaking targeting foreign apps, and the Biden administration is facing political pressure to take a tougher stance on data protection.
Tencent’s Sumo Group acquisition has also beaten the buzzer on UK foreign investment review under the National Security and Investment Act (NSIA), which came into effect on 4 January 2022. While the NSIA allows regulators to call in transactions from before that date, they have done so sparingly. However, businesses should keep the NSIA in mind for similar transactions going forward.
Market trends suggest that gaming may remain an active space for deal-making. Financial stability concerns push independent studios to sell, while larger companies seek to integrate content into their own platforms. Furthermore, recent Chinese regulations have restricted gaming in the world’s largest market, squeezing developers and driving Chinese companies to look abroad. In the frenzy, investors should remember that CFIUS and its counterparts are still watching.
