Just over ten years ago, in the heady days of November 2005, PartyGaming had all the swagger of someone whose name had just been added to the VIP guest list for the hottest club in town.

After a successful IPO earlier that summer, PartyGaming was about to be elevated to the FTSE 100 – the index of the UK’s largest publicly traded companies – with a valuation of almost GB£ 5 billion. How things change. A decade later and PartyGaming found itself involved in a sort of “Buy one, get one free” discount offer with Bwin for around GB£ 1 billion being squabbled over by GVC and 888. From GB£ 5 billion to GB£ 1 billion is what the City would no doubt dress up as “negative value creation”.

From that high point in November 2005, the cards ran against PartyGaming. Fewer than 12 months later UIGEA was passed in the US and the company was forced to switch off most of its players. PartyGaming then turned its attention to Europe but was competing with other poker rooms that were still taking revenues from the US which they could use to out-muscle PartyGaming on marketing in the European markets. PartyGaming tried to replicate the success of poker with the likes of PartyGammon (backgammon) and PartyBets (sports betting) but without really making an impact. There is an argument that history could have been different if PartyGaming had not listed on the stock market. Had it remained private, no-one would have realised how much money it was making in the US and UIGEA might not have been implemented when it was. After UIGEA, as a private company, PartyGaming might have had the option of trying to stay in the US, like PokerStars.

The reality was that by 2010 PartyGaming profits were down to US$ 44 million and both it and Bwin were under pressure from a variety of sources. Despite recording large revenues, Bwin had always struggled to convert it into sustained, meaningful profits. On the face of it a merger between the two companies seemed to make sense. It would create a large market-leading entity, seemingly with expertise in both sports betting and gaming. The perfect all-round combination?

But at the time the merger was announced GBGC wrote the following:

“The effect [of the merger announcement] was to cause a shudder through the online gambling industry at the prospect of competing against such a large company that could bring further resource to marketing and economies of scale that could leverage 20 percent growth on day one.
Fear not. Divorce rates vary but in the West about half of all marriages fail.

According to the Harvard Management Update, most mergers fail to add shareholder value. Indeed, two thirds of the newly formed companies perform well below the industry average.

Perhaps more worrying for the shareholders and the management of both companies is that a “death cross” has appeared in the financial charts of both companies. A death cross occurs when the 50 day moving average crosses the 200 day moving average. Such a move normally precipitates a fall in value, sometimes as much as 30%.

The fundamentals are not looking good. Both companies are spending increasing amounts on marketing without the return to EBIT.”

The merger has not been a success. The revenues and profitability of the combined business are no greater than Bwin was posting prior to the deal. But the very factors that were causing hardship for Bwin.Party were also helping GVC Holdings to grow its business.

The process of e-gaming regulation in Europe from 2010 onwards was causing both consolidation and an assessment as to whether or not to keep trading in “grey” markets. GVC Holdings was prepared to continue operating in some markets where others were not. The company had already purchased Sportingbet’s Turkish operations prior to its acquisition of the rest of the company in partnership with William Hill. GVC took the parts of the Sportingbet business that William Hill did not want.

This attitude to regulated and unregulated gambling markets was one reason why GVC’s bid was initially thought to be weaker than 888’s. How could GVC’s stance sit with Bwin.Party’s decision to focus on locally regulated markets? But Bwin’s CEO Norbert Teufelberger has apparently reconciled this issue. He told eGaming Review “it is very clear that operators able to manage a different regulatory risk profile have seen superior growth in the past three years. That cash flow can then be used to invest in growth in nationally regulated markets. So now we have the option to play with that”.

The GVC deal is just one of many that have been done in 2015. The catalyst has been the introduction of point of consumption tax on internet gambling in the UK. It is clear in interim results published so far that the operators are struggling to mitigate the impact of this new tax on their profits.

In the presentation of its 2015 interim results William Hill had a slide titled “Tax and regulation changes impact profit progression”. The company reported a hit of GB£ 35.4 million in the new UK point of consumption (POC) tax and total costs represented 77% of net revenues in H1 2015 versus 69% in H1 2014. The overall “impact on profit progression” for William Hill was to reduce the company’s operating profit by 20%.

Similarly, Ladbrokes said the UK POC tax had cost it GB£ 12.6 million in the first half of 2015, whilst Paddy Power took a triple whammy of new tax increases in all three of its main markets in the first half of 2015:

1. EUR 25 million cost from the UK’s Point of Consumption tax
2. EUR 3.5 million from increased product fees in Australia
3. EUR 1.9 million from the introduction of VAT on e-gaming in Ireland

Ouch! So far, the only way the companies have come up with to try and solve this tax headache is to merge in the hope that a problem merged is a problem halved.

It is clear that “size matters” is the new mantra for i-gaming in 2016. Of course, high revenues are not necessarily an indication that a company is successful or profitable. 

But scale is certainly a means of trying to mitigate fixed costs and, although a number of big deals have been done in 2015, the process of consolidation will continue into 2016. A lot of money has been splashed about but to what effect will only be known in three to four years. The e-gaming sector would do well to take a lesson from the sage of Omaha, Warren Buffett. He has written:

“As a director of 19 companies over the years, I’ve never heard “dis-synergies” mentioned, (though I’ve witnessed plenty of these once deals have closed). Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. They should instead be standard practice.”

Come the end of the decade, such a process of honest reflection could be distinctly uncomfortable for some e-gaming executives and their shareholders.

Lorien Pilling, Research Director, Global Betting and Gaming Consultants

A longer version of this article was written for the February 2016 edition of GPWA Times