03 16 Sellers Panel: James Schmalz [Digital Extremes]

Bruce Milne

 

Now, finally let’s hear from James Schmalz, founder and CEO of Digital Extremes.

 

James Schmalz

 

Thank you. I’m James Schmalz from Digital Extremes. We make video games and I’ve been doing this for about 23 years. I started right after university, just making games on my own, making $1200 a month when I got to do it full time, and everything grew from there. Every year we started adding a few more people, games in general got bigger, so we had to grow the company, and then 22 years later, we’d had a great deal of success, especially in the last couple of years.

 

I’d know Jim Perkins from Corum for almost all 22 of those years because he was in the industry. We had a conversation at a video game conference and he asked if I’d thought about selling the company. I had not at that point because we were on a skyrocketing path of success at that time, but he suggested I check out the market. I thought that would be a really interesting experience, so he and I started talking to some companies and seeing what the possibilities out there were. There were plenty of times when we didn’t bother having conversations because we knew it would be a bad partnership, but something that really caught our ear when we were talking to people was our ability to have more exposure to the Asian markets. Anyone who is at all familiar with the games industry knows that Asian markets, China in particular, are just monsters for video games. Culturally we don’t have that perfect fit for over there.

 

So, as we were talking to companies in that market that were interested, it got us excited and it seemed to lead to a real possibility of an acquisition that made a lot of sense for us to grow even further. Eventually we were majority purchased by Leyou Technologies and so far they have been an absolutely fantastic partner. In our industry, again anyone who is familiar knows that certain times acquisitions happen and they turn into nightmares because of cultural incompatibilities between companies. So far, ours has been perfect. They are helping us access China and the Asian markets better, and have proven to be fantastic partners in helping us achieve the next level of goals.

 

Ultimately the whole process, it took longer than expected, but it has so far exceeded our expectations in terms of what we could accomplish by going through an acquisition of this sort. It’s not something we were initially even interested in doing, so it’s turned out great on all fronts. Thanks to Jim at Corum for leading us on that path, because it has been fantastic for everybody on our side.

 

Bruce Milne

 

Thank you, James. I’m sure there will be a couple of questions for you.

 

Jim, you’re on also. You first met Corum when we sold your company, right?

 

Jim Perkins

 

That’s right, back in 1996. We did that deal together, Bruce. What I want to comment on is that in dealing with Asian companies you require certain approvals, both from the Hong Kong stock exchange, where Leyou is listed, and from the Ontario government, where James is located.

 

It was quite a process, but we got it done. I must say that the team at Digital Extremes were very well prepared, both from a financial document point of view and a legal document point of view. So when PWC came in to do their audit, they passed with flying colors. One lesson there is to be prepared and they were very well prepared.

 

Bruce Milne

 

They were and it helped, and I remember just as they were closing, James, I got up and I looked at the stock and it had dropped some crazy percentage, maybe 50%, it had spiked down, part of this extreme volatility of last summer, but it still got done.

 

James Schmalz

 

The Asian markets are still on quite the roller coaster, but hopefully things are looking to stabilize going forward.

 

Jim Perkins

 

The Asian buyers are still the top buyers in this market, regardless of the volatility of the market, they have the most cash, and it’s transitioning from gaming to other businesses as well, we’ve noticed in other transactions.

 

Bruce Milne

 

Well they have a staggering amount of cash, as we saw from the largest deal this month with Qihoo. Speaking of cash, one of the things we talked about earlier is that there is around $4T now, $3T of it in the PEs, they’re now the largest active buyers, and we’re going to be co-sponsoring with Vista in Austin for a conference later this year. They were one of the largest buyers last year with 43 deals. The strategics have about $1B. Keep in mind that these companies are really just a large collection of acquisitions. They don’t develop themselves anymore, so they are hungry for new young talent and good ideas.

 

This is a segment from Tech M&A Monthly: Sellers Conversation (March) webcast. For more information, please visit Corum Group's Software M&A Webcast Archive

 

quotesOne of the things that really gave me a lot of confidence, as Corum took us through the process, was that ultimately, a deal is about the people. It’s about chemistry, the fit, the synergy between the people involved. quotes

Chau Nguyen
Campus Special