Murders and Executions
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June 30, 2026
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Murders and Executions
If your objective is to kill companies quickly, you could hardly do better than games industry M&A
“In the morning I carefully apply an industry-standard WACC to the slowly increasing forward cash flows, followed by an appropriate terminal multiple for the DCF”In late 2000 I joined EA’s Corp Dev team and shortly later was promoted to run the group. I was in way over my head. I had been an operating manager at much smaller companies prior, not an M&A specialist. The EA execs all seemed skilled at finding the smallest error in any analysis my team and I produced, and at reminding me I was lucky to have the job. I had thought I was joining an industry of creativity and whimsy, and instead found I was in a gladiator academy of macho math graduates.<br>What I quickly realized was that the exec team didn't just know the games in the industry, they knew everyone in it: the personal stories, motivations, and dirty laundry. My presentations on the numbers and the IP quickly turned into discussions about the people and whether they could be depended on. As a rookie among titans at the top of their game, I sounded dumb most of the time.<br>Despite the dominant position they had built, EA had just come off a string of multiple unsuccessful acquisitions. I met a lot of game company founders, and their response was deafening: EA’s most recent acquisitions had resulted in studios destroyed and beloved games cancelled. My listening tour turned into an apology tour.<br>Back at the home office, the self-flagellation was even worse. I asked as many colleagues as I could about how the company worked and what needed to improve in M&A. Two separate execs told me the answer was “Do less M&A.”<br>It was a rough start, but it perfectly teed up a conundrum the industry has been grappling with for at least the last 25 years.<br>Autopsy: How Smart People Make Bad Deals<br>To buy a company you have to figure out how much it’s worth to you. And then you need to figure out how you are going to ensure it is worth that much after you’ve bought it. That’s it. Everything else is a method.<br>It could be so simple. But it’s very difficult in the real world.
“...Your deal looks immediately accretive, and the industrial logic is annoyingly sound…”Shareholders usually have a very simple objective: they want the value of their shares of the company to go up year after year. Bad M&A frequently is a result of the dealmaker (CEO, CFO, Corp Dev head) having a different agenda than his/her shareholders. The phenomenon is known as the Principal-Agent Problem: managers act as agents of the owners, but have different incentives and do not bear the full economic consequences of their decisions, while owners end up with the residual risk.<br>The Agency Problem is much more common than anyone cares to admit, so it’s worth understanding the psychology behind it.<br>For one, dealmakers are usually operating under specific near-term financial incentives, such as bonuses for revenue, profit, or stock-price growth. The incentives aren't only financial: a deal is a tangible demonstration that the CEO has a strategy, and a board will think twice about firing the CEO right after a big one.<br>More subtle are the social pressures. Corp Dev people commonly believe they get paid to do deals. They rarely stay at the same company their whole career, and a list of deals is a claim to fame. And, when executives see a competitor buying another major company in the industry, the FOMO is real.<br>Beyond the incentives, the tools and process of dealmaking often set executives up to fail. Discounted Cash Flow, accretion/dilution, and “football charts” of comparable transactions can make a terrible deal sound great. They are rear-view metrics that don’t predict the future, and they are only as good as their (often bad) assumptions. And deals are almost always done on a highly compressed timeframe that constrains deep thinking and analysis.<br>Finally, a strategy built on M&A rests on something you don't control: there may be nothing worth buying at the right price for years at a stretch, and if you want to grow, you may be stuck between doing nothing (and looking idle) or doing a bad deal (and looking busy).<br>Some combination of these pressures operates on the buyer and seller in almost every deal, and often feed off each other in a self-reinforcing system. I’ve been in dozens of pedantic debates about the appropriate interest rate on the discounted cash flow (a tool) because of a fundamental disagreement about whether to do the deal, which was really an argument about differing incentives.<br>Fallout<br>The fallout from these pressures and structural realities has led to massive carnage in the industry, in a way that nobody intended and nobody wants.
“Don’t worry, you’ll run independently and be free to manage the studio as you see...