[Jialun Says] M&A is a disease—it’s easy to get hooked on it.

Talking Tea at the Teahouse, Jialun Stories—Hello everyone, and welcome to “Jialun Says,” where we review the week’s fresh industry news and explore the latest developments in the sector. This week, several M&A deals involving publicly traded companies took place in the gaming industry. The most significant was Century Huatong’s announcement that its major shareholder had acquired a 43% stake in Shanda Games, with plans to inject it into the listed company in the future.Meanwhile, another publicly listed company, Wolong Real Estate, acquired a 13% stake in Junhai Network for 100 million to expand into the gaming industry. Taking these and many previous M&A cases into account, I’ve come to a conclusion: “M&A is a disease—it’s highly addictive.”

Why do I say that?

Let’s first look at a specific case: Century Huatong. Previously in the auto parts business, it went public in 2011. In 2014, it acquired Shanghai Tianyou and Wuxi Qiku, officially kicking off its journey of acquiring gaming companies. This was followed by the acquisition of Xiamen Qiyou, a browser-based game company, and FunPlus, which focuses on overseas markets. It had previously planned to acquire China Mobile Games,This time, through its controlling shareholder, it has acquired Shanda, with plans to eventually spin off Shanda into the listed company.

Another company, Wolong Real Estate, had just failed in its attempt to acquire the browser-based game developer Molin Technology, but shortly thereafter announced a 100 million yuan deal to acquire a 13% stake in the Guangzhou-based game company Junhai Games.

Meanwhile, already-listed companies such as Shanghai Youzu, Guangzhou 37, Tian Shen Entertainment, and Kunlun Wanwei have also been addressing their weaknesses in the gaming sector through continuous acquisitions.

Why are so many listed companies willing to acquire gaming company assets?

First, looking back to the origins of China’s A-share market, early A-shares were actually intended to provide underperforming state-owned enterprises (SOEs) with an opportunity to raise capital in the public market. Consequently, the performance of early-stage listed companies was not particularly strong—which explains why there are so many “ghost stocks” in the market today. At the same time, because the domestic listing process is lengthy and delisting is difficult,these underperforming SOE stocks have remained listed indefinitely. At the end of each year, companies would sell off a couple of properties to pad their profits and preserve their shells—a practice that gave rise to the large-scale phenomenon of backdoor listings and asset restructurings unique to China. Gaming companies, on the other hand, are characterized by the ability to generate strong profits in the short term due to the massive success of a single game, which perfectly aligns with the needs of listed companies.

Once they embark on an acquisition spree, however, these listed companies find it hard to stop—they become addicted to acquisitions. The reason is simple: buying 50 million in profits is always much easier than generating 50 million in profits from operations. Once they’ve tasted the sweetness of a single acquisition, who would still be willing to toil away developing products and chasing earnings?

But is all this merger and acquisition activity actually good or bad for the stock market and the gaming industry?

Personally, I believe the benefits outweigh the drawbacks.

For listed companies with poor performance, acquisitions not only generate profits but also provide opportunities to tap into emerging industries, making the companies more dynamic. Furthermore, since the acquired companies are subject to performance-based covenants, they will certainly do everything in their power to improve their games.

As for the gaming industry, more and more gaming companies are going public. With more abundant capital after going public, they’ll be able to develop better games. At the same time, they’ll continue to seek other investment and M&A opportunities, providing an exit route for other gaming entrepreneurs and revitalizing the industry.

Of course, every industry has its share of opportunists who exploit regulatory loopholes to conduct mergers and acquisitions or inflate performance figures through improper means.

However, in the long run, this is an inevitable process for the industry. The market will gradually undergo a process of survival of the fittest, ultimately leaving behind a group of companies that truly excel at game development. At the same time, regulatory authorities are continuously learning, upgrading, and refining the regulatory framework.

Chatting about tea in the teahouse—Jialun’s Tales. That’s all for today’s episode of “Jialun Says.” See you next time!