Once upon a time, back when the Internet was thought to be the pot of gold at the end of the rainbow, almost every UK games company was looking to float itself on the stock exchange.
And it wasn't only supposedly big and predictable businesses who were looking to raise cash for investment in the brave new world. Volatile developers such as Warthog, Argonaut, BITS and Kuju also took advantage of the opportunity.
The purchase of Kuju Entertainment
- best known for its Nintendo-published Battalion Wars
games - by German-based investment group Catalis
for £4.4 million ($8.5 million) marks the final collapse of that bubble. Warthog and Argonaut went bust years ago, while BITS switched from making games to online gambling software.
The genesis of the deal demonstrates the continuing attractiveness of games companies to people with cash to invest, however.
"Catalis' main business was DVD testing for the movie industry but it's recently moved into the Blu-ray and HD DVD areas and last year, it also acquired a games testing house," says Kuju CEO Jonathan Newth, explaining how the deal came about.
From Testing To Making
Looking to move further up the value chain, Catalis then entered talks with an outsourcing company that Kuju also used. Although these talks eventually came to nothing, serious discussions continued with Kuju.
"There seemed to be synergy in putting together a group of loosely-coupled businesses that overlapped both technically and in terms of their customers," Newth says. "It's definitely not a case of Kuju being acquired by a testing company. Catalis is an umbrella investment company that happens to own a game testing company, amongst others."
From that point of view, he says, it's very much business as usual at Kuju's four UK development locations in Surrey, Brighton, Sheffield and London.
"We've spoken to most of our major customers and they received the news either neutrally or very positively," he says. "The deal gives our customers and our staff long term stability, as well as providing opportunities for us and our publishers when we require testing work."
Getting Your Share
Despite being one of the UK's largest development outfits with over 250 staff, Kuju has gone through a rough patch recently. Although boasting turnover of £9.3 million ($18 million) in FY2005-06, it's posted annual losses over the past three years. And after raising more money by selling a third of its shares in recent years (in addition to the third with which it initially floated in May 2002), it became clear the only way to keep the company together would be to sell it.
"We haven't been actively going out to try and sell the company but it was something our institutional investors were looking for within a three to five year period," Newth says. Hence, when Catalis opportunistically came knocking, a deal was quickly agreed.
Yet the price of £4.4 million ($8.5 million) seems remarkably low, especially considering that as a 20-strong outfit, Kuju [then known as Simis] was sold to UK publisher Eidos for £1.8 million ($3.5 million) back in 1995.
The problem was with 67 percent of its stock floated on AIM, the UK market for emerging companies, the Kuju's overall value was effectively capped by its current share price. It was only 16p (31cents) on the day the deal, which offered 25p (48.5 cents) per share, was accepted. When the company first floated in 2002, raising over £2 million ($3.6 million), the shareprice was over 90p.
"From that perspective, you could say being on AIM hasn't done us any favors, but the flipside was we needed working capital to fund our growth," Newth says. "If we hadn't raised any money in 2002, we probably would have gone out of business, so from that perspective, raising money was the right thing to do. In hindsight maybe private equity would have better, but that's hindsight."
Facing The Future
With the Catalis deal now complete though, it's time to stop dwelling on the past. There are plenty of things to look forward to. The company's London studio is in the midst of completing its first Wii title, Battalion Wars 2
for Nintendo. Also nearly finished is the PC-only Rail Simulator
, which is being published by EA in Europe, while other games in development include PSP title Dungeons & Dragons Tactics
for Atari and an unannounced project for Vivendi Universal.
And as the company switches over to next-gen development, Newth says there will be plenty of new challenges to deal with.
"Historically, our staff numbers have been growing pretty substantially year-on-year but we've always had the same amount of projects. At the end of last year, it was around 13 or 14 across the group, which is a comfortable number to manage," he reveals. "Now we're working on next-gen projects, we're suddenly down to a much smaller number.
With projects becoming that much bigger, publishers are taking longer to decide whether to commit, as well as how much to commit for. This means independent developers will increasingly have to deal with longer gaps between projects, making the ability to endure cashflow stagnation vital. That's another area in which the added stability of Catalis should benefit Kuju.
Hence Newth remains confident. "At the moment, things are looking pretty good for us. There's definitely a good amount of work around. It's better than it has been for a number of years."
[Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He's recently rejected several seemingly friendly takeover bids from Nigerian bank officials.]