Super-Glu!?

It is the conference season, so I am falling a little behind but this is one that needs to be recorded here: The good folks from Glu announced that they would acquire AIM-listed 3D games specialist Superscape for $36 million (which however includes $11m in cash Superscape is still having in its savings account). On $7.2m revenue for the 6 months ending July 2007, this would equate to a revenue multiple of c. 1.7 (based on flat sales and a purchase price from which the cash at hand is deducted) which should be substantially higher than Glu's c. 0.6 (awaiting the announcement of their 2007 results).

Glu has been hit brutally following their announcement of their Q3 results, falling from somewhere around $10.40 per share to $4.19 tonight based on worse than expected growth and earnings. They had recently announced expansion into China - a market with numbing growth numbers but also hard commercial parameters - through the up to $40m acquisition of MIG, which however failed to help their share price.

Now, Superscape adds market share in more familiar pastures, namely in the US where 98.4% of its revenue are generated, and this may well have been the main reason for the buy: it will cement Glu's position in this key market. I am however not sure if there is more to this deal than that because the remaining parameters of Superscape do not look too good: the company focussed on the niche 3D sector, which did not fly as predicted (or should one say demanded) by the carriers. It is loss-making (and has been for a while if not forever). It grows less than Glu (as remarked by an analyst (report courtesy of MoCoNews).

Even if the deal rationale was synergies (reducing headcount as all they would really need from Superscape is their Moscow development facilities [which are a rather impressive operation as I could learn a few years back during a visit] and shut down their US and possibly UK offices), one would have to ask if this was the right deal. Superscape lost more than $2.8m on $7.2m revenue, so it is rather questionable if they could swing this into profitability quickly. I would posit that Glu would be rather capable of fighting for revenue and market share if it would not have to look at cost (their roster of titles is pretty impressive and they have been on an aggressive growth path), so would they not have been better advised to look for a profit-boosting acquisition as this seems to be their Achilles heel? Prove me wrong, Greg, please!