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New M&A action in the gaming sector

US based, Digital Chocolate has agreed to acquire Sandlot Games, known for developing titles such as Cake Mania, Super Granny, Tradewinds and Westward, across online, PC, mobile phones and consoles. Sandlot Games is the fourth recent acquisition in the area, following PopCap by EA, Sucker Punch by Sony’s PlayStation and Griptonite Games by Glu Mobile. Sandlot’s founder and CEO Dan Bernstein will become VP of Digital Chocolate and manage its studios in St. Petersburg, Russia, and in Bothell, USA. Terms were not disclosed.

M&A activity in the gaming space remains high and recent turmoil on the financial markets has reduced the price tags of several interesting targets. Mobile gaming company G5 Entertainment is one of the obvious targets, with a great and growing portfolio of iOS and Android games. Despite stellar revenue and earnings growth, the market is currently trading the stock at only 11.7x 2011 EPS. This is clearly unsustainable and given the non-cycle nature of this business, even a renewed downturn (which is at this point only hypothetical anyways…) will not affect earnings growth beyond 2012 too much. This is a structural growth story and the bigger gaming companies know this. That’s why they continue to acquire business even in these shaky times.

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