The online betting and gaming sector has been highly active in M&A in the past two years, but investment specialists warned that vertical integrations are highly risky for gambling groups.
Speaking on a panel discussing gambling groups acquiring companies from different sectors, Mohit Kansal, partner at investment firm Clairvest, said the biggest example of that so far had been Penn National Gaming’s $2 billion acquisition of The Score Media group in Canada.
“The Score has great reach as a media brand and Penn thought it could recruit players at specific CPAs with millions of The Score users being easily recruited into sports betting, but it’s difficult to be really good at everything: media, sportsbook and casino,” Kansal said.
Crispin Nieboer, partner at Tekkor Capital, said it was much easier to do horizontal integrations, because if “you buy a competitor, it is in the same vertical as your business. Gambling is a very commoditized industry, so you get consolidation and the reason it’s so attractive is you can add scale and create strong synergies.”
Nieboer said that while sports media and betting companies are continuing to converge, either through M&A deals or sponsorships and partnerships, one of the issues that arises from vertical integrations such as Penn National-The Score is that “with regard to marketing, you have choice (as an operator). If your advertising is not working on one platform, you can go to a different media, but once you own the media, you have many less options on where you allocate capital”.
The difficulty that can come from acquiring companies that differ from their core businesses can also be the result of a lack of due diligence and research into acquisition targets, Kansal said.
“There has been much euphoria in the market and people have been jumping into big moves, but there are also many different models and issues that can be looked into and analysed, like revenue share systems, SaaS, and understanding the value that is up and down the whole value chain. It’s why it’s so important to investigate and keep all options open and do lots of due diligence. There are so many small things that you can do before (going into joint ventures or M&A),” he said.
Both panelists agreed that while M&A is part of a drive to consolidate market share and technological expertise, it is also very much about operators wanting to have complete control of their tech stacks, especially in the U.S.
Nieboer said operators should think about which elements of the tech stack they really need to own. “The player-account management system is a simple piece of tech and it should be possible to use your own database, CRM, and segmentation tools, but do you have to own them all? The user experience and interface and customer-facing elements are what you need to own.”
Kansal also pointed to DraftKings’ merger with SBTech as a deal where the result and expected benefits of the betting brand owning the whole tech stack had so far not produced the anticipated results.
“You don’t know where DraftKings is going to use its resources. Competitors will continue to eat away at the group and when you have conflicts of interest, problems can emerge quickly. That’s why I’m quite skeptical about it.”
Nieboer said more M&A would take place in the coming months, but warned that vertical integrations are particularly difficult. “The time to market (for operators) is usually very tight and with vertical integrations, time to market is much longer than in the case of horizontal integrations where you can hit markets early and on time and it’s much easier, because the products are more commoditized.”
