More on Funcom Financials

Continuing Examination: Funcom financials

Layoff May Happen: Are they now an acquisition target?

This post continues our discussion of Funcom financials which began in Unrealized Expectations for the Secret World.

Looking at the Q1FY12 Funcom financials, their current ratio dropped pretty heavily from Q1-11 to Q1-12. However, that’s (a) expected given the information above and (b) they are still running a 1.32 current, which is more than enough to carry current liabilities.

They show a Q1 Debt percentage of 38.4% for 2012 compared to a 22% for 2011 (Q1 to Q1 figures). Yes, that’s a jump in borrowing. No, it’s not exactly an alarming rise.  Nearly the entirety of this is the jump in short-term liabilities leading to the reduced current ratio. It’s expected in a launch and they have facilities in place to assist here.

Those balance sheet actions are somewhat offset by the equity release on 20-Jun. The 60mm NOK (about $10mm USD) brings the equity portion of the balance sheet more into line. While this did dilute share value (somewhat influencing the drop-off in share price), they did a pretty good job of timing the issuance at/near a market high. The issuance was listed as substantially oversubscribed, indicating there was (in June) a higher demand for the stock than the number of issues offered.

Additionally, there are likely layoffs coming.   Those cuts will likely be largely CS and QA. The latter is to be expected post-launch, the forthcoming content will not require the QA levels the beta did. The former is expected given underwhelming sales. That’s part of the overhead SGA costs that scale down that Cato1999 references.

There are significant concerns with Funcom financials, but as I have already noted, those problems largely predate TSW. While losses did mount in Q4-11 and Q1-12. The increase in losses were generally one-time items (the launch of TSW). However:

  1. There are multiple consecutive quarters of losses in the Funcom financials. That’s never sustainable.
  2. The injection of equity financing will increase likelihood of demands for radical internal change. In particular, private equity partners are known for their “tear em up and sell em off” approach.
  3. The dilution of share value coupled with the market response to the 10-Aug issuance presses Funcom share prices to five-year lows. While the share prices have rebounded nicely this week, they remain deeply distressed.

It is not impossible, given this scenario, that they become an M&A candidate. Not just because a tech sector analyst mentioned it, but because a company with three cash-flow positive (albeit weak) products and a depressed market cap is an interesting buy. Further, in addition to their portfolio, Funcom is certainly one of the most innovative development houses in the industry. Additionally, their single server technology (assuming it’s theirs) along with the Dreamworld engine would have value in a sale. On top of that, the equity financing increases the urgency to restructure, fix, or sell fast.

Finally, other news indicates that NCSoft and Private Equity firm Provident are looking at game company acquisitions.

Provident is apparently going after EA. NCSoft is currently mum. If the former rumors are true, it’s unlikely that NCSoft will get into a bidding war for EA (but not impossible).

Even if NCSoft isn’t chasing down Funcom. M&A’s tend to come in waves and the early acquisitions are often those with weaker positions.

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