Gao Liandun, iDreamSky's founder and chairman [Photo/Dong Xingsheng (NBD)]

Dec. 11 (NBD) – Stock of Tencent-backed digital entertainment company iDreamSky Technology Holdings Limited ("iDreamSky", 01119.HK) climbed up by 1.12 percent on Wednesday to close at 4.52 Hong Kong dollars (60 cents) per share, after China's authorities released on Tuesday a game-license approval list where a mobile game operated by iDreamSky was included.

National Business Daily (NBD) noticed that on Monday, the company announced the plan to acquire a 69.21-percent stake in game producer and developer Leyou Technologies Holdings Limited ("Leyou", 01089.HK).

Fueled by the decision, shares of iDreamSky and Leyou hiked by 5.05 percent and 11.9 percent respectively when the trading began on Tuesday and later fell down.

According to the announcement, iDreamSky entered into a memorandum of understanding on November 29 with Yuk Kwok Cheung Charles, one of the controlling shareholders of Leyou and Yuk's wholly-owned companies Port New Limited and Novel New Limited regarding the possible transaction of over 2.1 billion shares in Leyou. But the purchase price was not disclosed.

It's worth noting that in March 2018, the game-license approvals in China were suspended, making game industry take a huge hit. Although the game-license freeze was thawed earlier this year, it still remained not easy for game developers to be granted with a license approval.

Under such circumstances, game companies were quite cautious with investments. In 2019, there were not many mergers and acquisitions (M&A) in the game industry. Data showed in the first half of 2019, only 8 acquisitions occurred in the domain and only one involved over 1 billion yuan (141.7 million U.S. dollars). 

According to a report on game investments for the third quarter in 2019 compiled by global consulting firm Digi-Capital, during the past 18-month period, the scale of M&As and initial public offerings of the game industry even dropped to the 2010 level.

Then why did iDreanSky, of which the market cap stood below 6 billion Hong Kong dollars (766.5 million U.S. dollars), seek to acquire majority stakes in Leyou, which had a valuation of over 7 billion Hong Kong dollars?

Zhang Shule, an independent game analyst, said to NBD that the second- and third-tier game firms are generally weaker in research and developement. iDreamSky acted more as an operator of game IPs, and the team-up with Leyou was aimed at enhancing the company's competitiveness in this respect and living through the hard time, Zhang added.

The current game market is showing a strong "Matthew Effect". There's less and less space for second- and third-tier game producers as the traffic and channels for distribution and advertizing are increasingly grasped by top game companies, Zhang explained.

"Furthermore, consumers' demand for well-developed game contents is growing so plenty of game producers are shifting to developing high-quality games," noted Zhang. "But most second- and third-tier game producers are not competitive enough in this regard."

Email: gaohan@nbd.com.cn