Poker Industry Merger, Acquisition, Alliance Scorecard

Last year, we gave the Entraction acquisition an “incomplete” grade because we simply don’t know yet how U.S. regulatory poker laws will be written.

However, this grade isn’t as difficult to dole out.

Entraction gave IGT a scalable business-to-business platform with player liquidity and a suite of games. Double Down is a business-to-consumer play, focused more of free-play social media games.

For social media games–particularly poker and casino ones–to be profitable, critical mass/player liquidity is everything. Double Down is no different than their SMG competitors, as only 2-3% of its users ever actually make a purchase (i.e. virtual chips).

While Double Down definitely has a strong foothold in the social media casino gaming market, this isn’t a tough one to break through in. The barriers to entry are low, and without a steady stream of more populace driven games to drive in new users (think Farmville for Zynga), it will be tenuous for the company to keeps its market share and justify the half-a-billion price tag.

Strategically, the deal makes sense from IGT’s perspective in that it rounds out its virtual casino / games reach. However, at $500M, the price, and potential revenue, just wasn’t worth it.

Double Down probably couldn’t sign this deal quick enough.

Like Carmelo Anthony going to the New York Knicks, the Party-MGM alliance was a foregone conclusion for awhile.

Bwin.party probably comes out the best in the deal. They get 65% of the revenue. For comparison’s sake, PokerStars only got 50% in their now defunct deal with Wynn. They also get to tap into and market to MGM’s massive “MLife” customer database.However, whenever you try to cram multiple business entities together in any merger or acquisition, you open yourself up to potential logistical issues.

Bwin.party is already a smashed together marriage of…Bwin and Party. Adding not only MGM, but Boyd to the mix as well, could limit how quick and nimble the venture will be in attacking the U.S. market. Will everyone do their fair share and play nice, or will egos clash and bog operations down?

According to sources, another cause for concern is that “within the ranks” of Bwin.party, many believe this new alliance will be generate so much work for development teams (launching new sites for new brands and catering to all of them, bogging down everyone) that “there will be little room for product innovation.”For MGM, it’s somewhat disappointing to see them settle for so little. Sure, they may not have to do much (comparatively) to earn their 25%. But precedence was established by Wynn-Pokerstars. Wynn got 50%. Why can’t a premium national brand like MGM get the same?

However, their grade gets upgraded simply because MGM has been behind the curve compared to their contemporaries when it comes to online poker positioning. This catches them up–big time.For Boyd, this is a case of settling. We believe (not confirmed) they were brought in by MGM to infuse cash into the partnership. Boyd also raises their profile by aligning with two market leaders.However, as one of the few genuinely liquid brick & mortar entities in Vegas, Boyd could’ve gone a different route, spent more money, acquired a platform, and then outspent and out-maneuver their larger competition, gaining more market share and revenue in the process (something we’ll touch on with the Fertitta Interactive deal in a moment).

At the end of the day, this just feels like a deal where everyone played it safe.

Regardless, we’ve learned that gaming industry analysts estimate that Bwin.party-MGM-Boyd will capture 20% of the regulated U.S. market. If they hit that mark, there will be plenty of money to split. But will there will be enough profits left-over after smoothing out the logistics of getting everyone on the same operational page to make it worth everyone’s while? And does this deal force Bwin.party to spread its technological resources too thin?

And yet another industry expert who worked with Cyberarts in the past said that he simply “was not impressed” with the company.

Still, there are some positives. As noted, the platform itself is well-regarded. Fertitta Interactive partner Tom Breitling backs up this sentiment as he told eGaming Review that:

“One of the key things for us was finding best-of-breed software, with an emphasis on internet poker, which has been market tested. CyberArts also brings a lot more to the table than that, such as an incredible platform to build upon.”

Additionally, Cyberarts has some interesting clients that could potentially be leveraged once real money gaming opens–like PurePlay–the largest subscription-based poker site in the U.S. They also provide platforms for casino table games, bingo, and social media gaming, which could be very useful to Fertitta Interactive as (presumably) the U.S. eventually allows more than just online poker wagers in the future.

Regardless, Cyberarts gets the A. They’re acquired and have a great partner with extensive reach (via UFC) in Fertitta Interactive.

Fertitta Interactive gets a C. They get a solid platform. We admire them doing what Boyd Gaming did not do: and that’s use their resources to make their own mark in the U.S. The problem is, their platformhas virtually no liquidity compared to, say, Bwin.party. According to our sources, they have potential customer service and staffing nightmares on their hands. Their money could’ve been better spent elsewhere.

IGT is the industry’s leading manufacturer of gaming machines and is an absolute giant. But nobody was really expecting them to get into the online poker game.Instead, they acquire platform network Entraction for a whopping $115M.

Unfortunately, we can’t give IGT anything other than an “incomplete” until we see how online poker laws are written in the U.S.After dropping $115M, will IGT need to partner with a B&M, taking a chunk out of their profits? Or even worse, what if Entraction, which once took U.S. bets but has not paid a hefty settlement ala PartyGaming, is considered a “toxic asset” and is not even allowed to operate in a regulated U.S. market?

We believe the chances of that are slim–but its a concern felt and expressed by contacts at many European operators.For Entraction, this deal is an absolute grand-slam home-run. They get $115M — a major score considering that OnGame–a comparable network platform– is rumored to be on the market but at half the asking price.

For Zynga, the only thing that keeps them from earning an A is their recent (Nov 2011) statements that they have no plans to enter the real money gaming market. If that’s the case, then there would’ve been more strategic acquisitions to be made out there.

For MarketZero, this is a no-brainer. They likely would’ve received company options, and with a billion dollar IPO set for Dec. 15, 2011, they’ll be set for life.