On October 21, 2023, GameSquare Holdings, Inc. (NASDAQ:GAME) (TSXV:GAME) announced it is purchasing FaZe Clan (NASDAQ:FAZE), a California-based professional esports and entertainment organization for US$17 million.

GameSquare, an international digital media and entertainment company, will acquire approximately 55% of FaZe Clan's shares. Set to close during Q4-2023, the FaZe Clan acquisition follows a recent trend of consolidation in the North American esports and gaming industry, which began in April 2023 when NRG Esports acquired Counter Logic Gaming.

The esports ecosystem has seen a simultaneous rise in global investment while local markets falter slightly – spurring opportunity for organizations to restructure and acquire players. Esports and gaming remain a larger consumer entertainment industry than movies and conventional physical sports combined. In North America, the gaming market is expected to grow to US$63.1 billion and the global gaming market is expected to reach US$187.7 billion in revenue by the end of 2023.

While FaZe Clan and GameSquare are based in the U.S., Canada also boasts an esports and gaming presence that is intertwined with the U.S. market. Notably, the Toronto-based esports team Luminosity Gaming remains one of the most competitive esports teams in North America by rostering 14 teams across varied esports titles at the highest level of competitive leagues. Notably, Luminosity Gaming recently won the Call of Duty: Mobile North American Championship in September and won the 2023 Pokémon Unite World Championships in August.

Industry familiarity is a must

Acquiring an esports and gaming business involves dealing with normal regulatory concerns, as well as having specific industry familiarity. This includes considerations regarding professional players, competitive leagues and prioritizing appropriate assets. Despite esports' explosive growth and legitimization, it is still a dynamic ecosystem where titles quickly fluctuate in popularity and markets adjust.

When it comes to M&A activity in the industry, buyers must be alert for important and valuable assets. This includes contracts for certain professional players, sponsorship exclusivity, rights to competitive gaming leagues and intellectual property (IP).

We have explored purchase considerations regarding employees during a business acquisition in a previous blog. Esports teams have an added layer of complexity regarding continued employment for professional players. In acquiring an esports organization, buyers can extend ongoing employment offers. However, a more common option is to restructure teams with the intent of improving competitive results or shifting league focus. In this context, buyers might run into labour and employment risks if employment offers are not extended to the new company's employees, but also problems regarding rules and bylaws on player trades and free agency.

Although there are similarities between physical professional sports and esports transactions, a major difference is that the former usually operates within a regional market. In contrast, esports organizations often operate at an international level with teams spanning different countries and with a (relatively) younger employee demographic.

An example would be a comparison between the National Basketball Association (NBA) and the esports title League of Legends. The NBA exclusively operates their competitive league in North America composed of 30 teams with players averaging 26 years of age. In comparison, League of Legends's developer Riot Games Inc. operates nine professional leagues split up in North America, South America, Europe, Asia, the Middle East and Africa coordinating a circuit in total of 93 teams, accompanied by premier leagues composed of more than 200 teams attempting to qualify to compete in each region's professional league.

This year, League of Legends' most prestigious tournament, the League of Legends World Championship, will take place in South Korea and feature 110 players (with an average age of 23) competing for a US$2.25 million prize pool.

Sponsorships and branding

Given the nature of the esports and gaming industry, every sponsorship and branding opportunity is offset by the opportunity cost of collaborating with competitor brands. A common sponsorship dilemma in sports occurs when major apparel partnership with Nike, Adidas or PUMA is at stake.

In South Korea, teams like Gen.G partner with PUMA while their rival team T1 has a Nike partnership. Purchasing an esports organization with an existing brand partnership could limit opportunities for new partnerships or even conflict with the purchaser's already settled partners.

This dilemma between the buyer's brand partners post-acquisition could come up in GameSquare's acquisition of FaZe Clan. For example, FaZe Clan is partnered with a major PC gaming peripheral manufacturer while GameSquare owns Complexity Gaming which is already partnered with Lenovo (that produces its own line of PC gaming peripherals).

IP ownership

Beyond brand opportunities, IP ownership is uniquely confusing compared to traditional professional sports. IP ownership regarding licensing can become problematic given that a major distinction between esports and traditional professional sports, is that someone owns the video game competitors are playing.

For example, while the National Football League (NFL) has the IP rights to broadcast NFL games, the sale of NFL merchandise, and the commercialization of likenesses for their players, the NFL does not necessarily own football. Meaning that if someone was to try to create their own football league, anywhere in the world, the NFL does not necessarily have the IP rights to prevent this happening. However, because a game developer has IP rights to the esports title being used for competition, the developer can established strict rules for competitors to use their video game. Infringement of these rules can completely block individuals from competing, block investors and prevent brand sponsorships.

One example is when Nintendo released new competitive rules in October 2023 to regulate community tournaments for their video game Super Smash Bros. The new rules apply to Super Smash Bros tournaments of smaller scale not meant for commercial gain, banning any use of Nintendo trademarks or IP that include Nintendo's logo, products, services and video game titles, as well as the complete ban of the sale of food and drinks at physical events.

Essentially, acquiring an esports organization can require further risk assessment since the video game's developer might have strict IP guidelines. These guidelines could block brand collaborations and sponsorships, or even ban competitors from playing a video game entirely.

Players and content creators

For labour and employment considerations, esports organizations tend to sign several professional players and content creators to their roster who develop their own personal brands and pursue collaborations, requiring specific IP clauses in their contracts. Some employment contracts might not have clear regimes for IP ownership, which can lead to difficulty in leveraging the likeness of professional players or content creators. Understanding the nuances of IP will prevent unnecessary obstacles during M&A and create more certainty.

Companies looking to acquire esports organizations should consult with an experienced lawyer who can help structure the deal, identify key assets and mitigate risks for a successful integration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.