S Korean games group on the prowl

The ballooning market for companies developing games for mobile devices and social networking websites is forming a bubble, according to one of the world’s biggest online game companies.

Nexon, the biggest South Korean online game company by revenue, said it was on the hunt for overseas acquisitions. But Choi Won Hyuck, its public relations director, told the Financial Times that recent deals in the sector indicated “there is a bubble in the market right now”.

Nexon, which had Won703bn ($585m) in revenues last year, has already turned to acquisitions to expand its reach from traditional online games on the PC to newer, fast-growing platforms – notably gaming on mobile devices and on social networking websites such as Facebook.

The privately held company acquired two South Korean rivals, Ndoors and Gamehi, earlier this year, and this month expanded its reach in South America and Europe by taking a 30 per cent stake in Flash game developer BoomBang Games of Spain for an undisclosed amount.

Nexon’s moves are part of a recent flurry of deals in the sector, where big players have snapped up promising start-ups. Disney Interactive paid $563m for Playdom, a two-year-old social gaming company, in July, while Electronic Arts paid $300m for Playfish last November.

Last week, Japanese social gaming company DeNA bought Ngmoco, a San Francisco start-up, for $400m, or 10 times Ngmoco's initial funding. Mr Choi said he believed Ngmoco’s selling price was significantly raised because there were multiple bidders.

With such competition pushing up prices, “it’s now a very big risk to make such acquisitions”, Mr Choi said.

But Mr Choi said that despite the high prices, Nexon was still actively seeking more acquisition opportunities, particularly among companies specialising in developing games aimed at the iPhone, Apple’s smartphone, and the iPad, its newer tablet device, as well as social gaming companies in Europe and South America.

“If the potential of the company is very good then we will still buy it. But there are also alternatives such as business alliances,” he said.

Some analysts say the large price tag attached to relatively small companies is justified. Piers Harding-Rolls, head of games at Screen Digest, a research company, said that while the amount paid on recent deals appeared high based on the target’s financial performance, the value to the acquirer was often seen in the target’s potential and market position.

“These deals were about getting access to a specific expertise and position in the market,” he said.

The Ngmoco deal, for example, gives DeNA an entry into the US market. Ngmoco makes games for the iPhone and has also developed a social network for the iPhone, iPod touch and iPad that connects gamers, he said.

“This particular area is very hot because it is the intersection between social networking and app games on a mobile,” said Mr Harding-Rolls.