The Metaverse: Investments Fuel M&A Frenzy

In this week’s episode, we’re discussing the anticipated surge of metaverse M&A activity in Asia Pacific amid enthusiasm shown by game and education investors. Joining host Julie-Anna Needam is Jessica Wong, senior M&A reporter for ION Analytics based in Hong Kong. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you’ll learn:

• What is the metaverse
• Why businesses are investing in the metaverse
• The importance of Microsoft’s acquisition of Activision Blizzard and other dealmaking
• The surge of fundraising and investing, from corporates to celebrities
• Regulatory challenges regarding privacy 

[TRANSCRIPT]

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie Anna Needham, a journalist who's been covering M&A for a decade.

In this episode, we're discussing the metaverse. I'm joined by Jessica Wong, a senior M&A reporter based in Hong Kong.

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Hi Jessica. Thanks for joining me today.

JESSICA WONG: Hi Juliana. Thanks for having me.

JULIE-ANNA NEEDHAM: So to begin with, the big question-- can you explain what the metaverse is? I think it's maybe not that easy to describe.

JESSICA WONG: OK, yeah, so that is the big question. So in short, the idea is that you can enter the internet and be a part of it. It's basically the internet, but the idea is that it's around the space and your space in it.

So you're in and taking part in the internet as a digital avatar. An avatar, by Mark Zuckerberg's definition, is basically a 3D representation of you. So right now we're seeing each other on a screen. But instead of that, you'd actually-- you could see me as another form of representation.

So for example, you could see me as an animal on the screen. But my face doesn't have to be on the camera. But it still has all of my expressions and gestures. And we can both be basically on this call in a virtual space, where we're both avatars and where we're basically physically there in the virtual world.

So it basically has our human and personal interactions virtually. But the cynical answer to the question is [INAUDIBLE]. Yeah, it's like a New Age buzzword for the internet/cyberspace. It's a bit like if you put on a VR headset. It's like the easiest way to describe it.

You could even argue that we're already living in a metaverse in the last two years. Because we spend so much of our social and work interactions online already. And basically, the believers of the metaverse are saying, it's the future of the internet.

Because rather than being behind a screen, we're all going to be in this virtual world, whatever that will look like.

JULIE-ANNA NEEDHAM: So we're talking to each other over a virtual platform with you being in Hong Kong and me being in the UK. Could you give us some examples of metaverse applications?

JESSICA WONG: Yes, I can. So in gaming, it's the most obvious one. Personally, I don't play any games myself. But I think things like World of Warcraft, I think that people who play it out should know what I'm talking about. I think you can actually be a character in those games.

Another one is, obviously, like right now, for example, if you're on a Zoom call, you can be in like floating around as basically digital avatars. You can-- they're saying, you can watch DJs in the metaverse. You can go to digital concerts in the metaverse.

They're even saying you can travel overseas by just putting on your headset and going to India. They're saying that you can have your digital avatar go shopping for you. They can try clothes for you. You can feel what those clothes are like while sitting at home.

You can view houses, properties. Another one is health care. So that one is, obviously, quite popular one. You can visit doctors overseas, and have consultations, and get treatments from doctors that are based remotely or if you're based remotely.

So yeah, the idea is you can use it in every aspect of your life. That's not just gaming.

JULIE-ANNA NEEDHAM: Yeah, and it's so interesting because you can see the benefit of a lot of those applications, particularly, given the last two years, where there would have have been a lot of restrictions on movements

JESSICA WONG: Yeah, exactly. And I think the idea is also just because people realize that you do need that human interaction and that social connection, and I think that's-- don't get that behind a screen.

And I think that's what the proponents of the metaverse are saying, is that you can still experience that without having to be there physically.

JULIE-ANNA NEEDHAM: And looking at the businesses involved in this space, since when have businesses started to pursue and invest in the idea of the metaverse and why have they done that? Obviously, the pandemic is probably expedited it like a lot of other technology.

JESSICA WONG: Yeah, so I think, pandemic aside, so during what-- during the pandemic, and especially in the last year, we saw cryptocurrencies gaining traction all around the world. The price of bitcoin went up, I think, to its all time highs in November last year.

Everyone just basically went mad. All the crypto companies were raising funds, and it was just going insane. Everyone was buying and selling. The other thing is NFTs, which are-- basically, I'll try to explain briefly.

Basically, NFT, in case you haven't heard of it, is a nonfungible token. What on earth is that? It is a digital title deed, so it's basically like a certificate that tells you that you own something.

So let's say, I own a house, and I've lost document-- a physical document that tells you that I own that house. The NFT is something-- it's basically that certificate that tells you that you own it.

And it's non-fungible, meaning that I can't trade that digital certification for something else. Because the good that it represents is a different good. It's of like a Pokemon card that you can't trade a Charizard card for.

JULIE-ANNA NEEDHAM: OK.

JESSICA WONG: It's how I understand it. But, yeah, but basically so that's crypto, NFTs all coming to the fore last year. And that basically can create the infrastructure for a digital economy, which is basically what you need for the metaverse to really kick off.

JULIE-ANNA NEEDHAM: So all of those building blocks are in place now. Could we look at fundraising? How much fundraising activity has there been, and who is investing?

JESSICA WONG: Yeah, so last year, according to Crunchbase, metaverse-related companies raised, at least, $10.4 billion. That's in venture capital funding. That is compared to 5.9% billion that was raised the year prior to that. And it's by far the most amount raised for the metaverse in a single year in the last decade.

People that are investing is-- obviously, you've got Silicon Valley-- VCs. You've got the actual company founders of VCs. And then you got people. I don't know-- just kind of random people, like the former chief digital officer at Louis Vuitton, like, well, at least, LVMH, the group.

You've got Andreessen Horowitz, the big Silicon Valley crypto investor. And then you've also got corporates that are branching out and saying that they want to invest in the metaverse ecosystem. They all use that. They love to use that word-- ecosystem.

In Hong Kong, we've got a gaming company called Animoca Brands. They are being valued at around $5 billion in their latest round. And this company has said that they've made at least 150 investments, some of which have been going into the metaverse-- so corporates, VCs, crypto funds-- that kind of thing.

Also like, I think, celebrities are getting into it.

JULIE-ANNA NEEDHAM: And looking at some of the deals that have taken place in the space, we could perhaps start with the big one, Microsoft and Activision. Could you talk a little bit about that? And then tell us what other deals have happened as well.

JESSICA WONG: Yeah, so, I mean, Activision, that was the biggest deal that we've seen so far-- so $75 billion worth of money going into that. it's Microsoft, so they, obviously, want to create a metaverse version for things like Microsoft Teams calls.

Aside from the Microsoft one, there's a lot of startups that are raising at seed rounds as well at really, really high valuations. So, for example, the guys behind Pokemon Go, that company Niantic, San Francisco-based, it's a start up.

They announced last year, they're raising $300 million, and that's at a $9 billion valuation for the metaverse. Another seed round was another US company, a Virginia-based company, called Hugo Labs gaming company. This is a seed round, and they raised $450 million, and that's on a $4 billion valuation.

So it's just kind of insane. And then in Asia, we're seeing a few others as well. So in Australia, there's an NFT game publisher. They got valued just last month at $2.5 billion with a $200 million fundraise. People like Tencent joined that round.

And then in Vietnam as well, there's a gaming developer called Sky Mavis. And they have an NFT game called Axie Infinity. So, again, this is another startup. And they raised, I think, last year-- yeah, last October on a $3 billion valuation.

So it's just kind of insane. And then also, you actually have non-gaming companies making acquisitions or doing M&A. So that they can basically join the metaverse game, as it were. Nike -- they bought a digital sneakers company called RTFKT. I don't know if that's the right pronunciation.

But they bought this digital sneakers company, basically, as their way of entering the metaverse and the crypto collectibles, NFT space. This was in December.

JULIE-ANNA NEEDHAM: Can I just stop you there? So digital sneakers? They're shoes that you can only wear in the metaverse?

JESSICA WONG: I would assume so. [LAUGHS] But, I mean, like they would need to create the shoe first. It's like Meta or Facebook-- Facebook/Meta. They created like a glove. And when you put it on, you can feel things in the metaverse.

So I assume that's what the digital sneakers thing is as well.

JULIE-ANNA NEEDHAM: Yeah, I'm not sure I'll be investing in any digital sneakers or trainers anytime soon. And looking ahead, Jessica, it's obviously a really exciting time within the metaverse that there are, obviously, loads and loads of different factors at play. How do you see the industry evolving?

JESSICA WONG: Personally, it's quite hard to put a finger on it. Because the idea of it, it could literally just amount to us in 10 years time wearing a VR headset on this call, instead of looking at each other on the screen.

Or we could actually all just become digital avatars. And yet, by which point, I don't know, we'll be living in a world where the governments have regulated it, and there are more deals. And like metaverse has actually come into fruition.

And maybe by then, valuations would have kind of died down a little bit. Fund raisers would have died down a little bit. It's difficult. Because it's a bit like asking in the '90s what the internet would look like in the 2000s.

JULIE-ANNA NEEDHAM: But, I guess, the more regulation-- going back to what we were saying earlier-- you've got the deals like the Microsoft Activision one. But then on the kind of sidelines, you've got all the cryptocurrency, the nonfungible tokens, and how they can be better regulated to become more part of the mainstream.

So, I guess, that's potentially an area we'll see more growth in.

JESSICA WONG: Yeah, I think so. I think the main regulatory challenge as well, though, to concepts like the metaverse is some privacy. And that's, obviously, the main challenge that we're seeing to facing Big Tech today as well.

But at the same time, Big Tech is still doing its thing. So yeah, I don't know. Because the metaverse-- it kind of freaks out a lot of people. Because it's like all my body language and facial expressions are potentially being recorded by these big companies.

JULIE-ANNA NEEDHAM: Yeah, interesting -- there's some very interesting moral and ethical questions that always arise.

JESSICA WONG: Yeah.

JULIE-ANNA NEEDHAM: Jessica, we'll leave it there-- really nice to talk to you. Thank you.

JESSICA WONG: Thank you so much for having me.

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JULIE-ANNA NEEDHAM: That was Jessica Wong. Thank you for listening to this week's episode of Dealcast, presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast.

You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

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