Continuing from Part 1, this article addresses the concept of mergers and acquisitions, which are undoubtedly important to the smaller developer. For those outside the industry, or who don't hav a business background, the overwhelming question is probably a simple "Why?" Part of it seems to be a trend in the industry, a trend which has happened in many other industries before. Large game companies (i.e. EA, Ubisoft, Microsoft, Nintendo, Sony) like to acquire up and compning developers for a number of reasons, such as adding fresh thought to the development process, adding new intellectual property to their roster both from the standpoint of the software and the brand that accompanies it, and a broader mass appeal, not to mention the added revenue. From the standpoint of a start up developer, a big studio taking over gives you many of the perks that come with being in a big company, and may remove many of the financial concerns and burdens that occur with a smaller business. Of course, if your small business is more like, say, id software, or if you happen to have a genius like, say, Miyamoto* break off to form a small development company, then you're probably not looking into being acquired.
So, what are mergers and acquisitions? Well, it's two different means to the same ends: two companies combine to form one. A merger is where two companies come in on more equal footing, and merge into one new entity. An example would be SquareSoft and Enix becoming SquareEnix. An acquisition, on the other hand, is typically used to describe a large company absorbing a smaller company, such as when Microsoft originally acquired Bungie. In both types of transactions, the mechanism is controlled by the contract, and often times they all work about the same, other than the respective sizes and bargaining powers of the entities. Hence, Mergers and Acquisitions (or M&A, as they're often called in the legal and business worlds) are typically discussed as a single concept.
This brings us to the basic workings of the concept. Generally, this starts either by one company deciding it wants to acquire another, or two companies mutually deciding they're be better off joining forces. From there, the deal is negotiated through, once again, the contract. There may be some additional regulatory issues if there's a cross-border transaction or if both companies are publicly held, or if the new company would result in some sort of a monopolistic anti-trust monster, but generally, there won't be too much government interference to worry about, unless a location happens to require particular permits. There is also always a tax element to pay attention to, but that applies on both a local and national level (as well as a state level in many places). Once all of the details are ironed out in negotiations, there is some sort of closing to sign the documents, and then the companies are re-assembled according to the terms of the agreement. As this is such a flexible process, given the flexibility of the agreements and the dramatic differences between potential parties, this is another occasion where tips are more appropriate than a guide.
1. Keep your position in perspective. Remember that no two transactions are alike, and your place respective to the other party in the deal may reflect directly on your bargaining power. If it's a merger, you probably can't force the other party into too many different directions. In an acquisition, I tend to believe the little guy often has more power than the big guy. Typically, in an acquisition, the big guy wants the little guy, and the little guy may be able to get a few extra perks because of that desire. Of course, individual situations do vary.
2. Each side needs independent counsel. Much like I stated in the previous part, everyone needs to have their interests represented independently. More than that, independence removes the appearance of impropriety in case the deal falls apart down the road.
3. Organization is the absolute key. Negotiations in these deals can, and do, drag on for months at a time. Without a pretty thorough organization, things will be overlooked. Your legal representation should handle organizing the documents and keeping you apprised of the word for word changes in redlined versions, but checklists help with the bigger picture.
4. Remember: Contracts are flexible. When it comes right down to it, most any outcome can be written into the contract. If you want to maintain separate offices, that can be done. If you want salaries locked in for 5 years, that can be done. If your big sticking point is making sure there's a frozen yogurt machine in the breakroom, that can be addressed too.
5. Build in a mechanism to resolve future issues. As much as every attorney wants to be sure the document accounts for every contingency and every alternative, inevitably something will come up. If a way to resolve issues is built into the contract, hopefully it will keep the deal from falling apart over unresolved problems, be they with healthcare or office attire or the number of action figures allowed in a cubicle.
In the grand scheme of things, M&As are pretty routine. They have been happening in business forever, and there are plenty of professionals who have significant background in these transactions. Now that the game industry is one of the biggest kids on the block, more traditional business issues will continue to arise in the industry and be well publicized, just as the recent events noted in Part 1 were.
*Note: There's no indication this would ever happen, but he's a recognizable example of the concept. This is not meant to create some grand rumor about a new studio in the works.