bwin & PartyGaming: Consequences of a Deal

Yesterday, breaking news struck the industry: the two biggest public listed gaming companies will merge. Shareholders and authorities still have to accept the merger, but they probably will - the boards of both at least seem to be confident: they agreed on penalties in the region of above 10 million euros if one of the sides fails to convince their shareholders.

Probably you already read our news about it, so I don't have to talk about the basics, but speculate about consequences.

Cost Savings

The stock markets typically like mergers, and one of the biggest reasons are cost savings:
• Customer Service especially for smaller language areas is more efficient for a larger corporation.
• PartyGaming will not need their own bookmakers anymore, as bwin is quite strong on that end.
• Interesting will be the question of their software development, as PartyGaming maintains a 400-strong IT company in Hyderabad, India, that could be a strong competition for bwin's IT sourcing strategies.

Another story are saved opportunity costs:
• PartyGaming does not need to look for another M&A in the sportsbook vertical
• bwin does not need to invest into building up a casino vertical

Savings in marketing are possible, but harder to realise - as PartyGaming and bwin would do good to maintain their respective strong brands. Big media houses co-operating with both could see pressure on their prices - but more important is the access to marketing channels. Means: we could see PartyPoker ads on TV stations that historically worked a lot with bwin and vice versa.

Merger Risks

Merger risks should be rather small. In contrast to many 'traditional' companies, no supply lines or assembly lines have to be merged. The company cultures should be close to each other - both are very international and diverse and the staff is comparably young and comes from a lot of different backgrounds. The fit of the management culture is harder to assess from the outside - and of course the new organisation will also lead to some competition for key positions. But that's normal and does not constitute a special risk.

Online Poker

Now that's interesting: the most relevant part of the merger (from a poker player's viewpoint) is also the one where the strategy for the new "pwin" entity is the least obvious. Let's look at the scenarios:

1. Leaving everything as is
   Possible, as this skips all tough strategic questions and avoids risks. But if this is going to be the way, then just for maybe 12 months - after that, the pressure to realise synergies in the poker vertical would become more intense. Even in this scenario, we would probably at least see poker network mergers in Italy and France, where combining the player pools is an even bigger opportunity. It could even lead to the combined entity becoming market leaders there.
   
2. PartyPoker moves over to Ongame
   Highly unlikely - for good! PartyPoker knows about the problems Ongame has - and the smaller of these problems is the software that is clearly inferior to the quality software of PartyPoker itself. The big risk would be all the legacy contracts that seem to force Ongame to keep small skins that do not really contribute to the network would infect the PartyPoker liquidity pool. This would lead to shrinking margins for PartyPoker and thus to less investment into player acquisition. The enlarged Ongame would be smaller than the sum of PartyPoker and Ongame today.
   
3. bwin moves over to PartyPoker
   PartyPoker - even though many don't know it - also technically supports skins / can work like a network. By having bwin - and selected other Ongame partners such as Betfair and Coral - move over to PartyPoker, the healthy parts of Ongame could make PartyPoker flourish.
   The upside: this new entity could be way more than the sum of it's parts - and would have the potential to grow significantly.
   The challenge: the new network would have to make sure it regulates it's network (skins & affiliates of the skins) very well to make sure it does not fall prey to cannibalistic tendencies and business models.
   The question: will bwin want to do this? It would mean a huge backlash to Ongame, which bwin acquired for loads of money (>$400m) back in 2006.

Stock Markets

The stock markets reacted very positively on the move (see above). Maybe yesterday's voice that spoke of a regulation of the US and a potential return of PartyPoker to their past home market played a role - but certainly, investors and analysts see this as the right move for both sides.

Bwin won 17% in a day, PartyGaming even 20%. That's more than half a billion of dollars created in market capitalisation on just one day - impressive result from such a small pdf :)

More Stuff

PartyPoker press release

Bwin press release

The Economist on the gambling dispute

The Wall Street Journal on the merger