On 4 Feb, Tencent has acquired a majority stake in Riot Games, a private US based online game developer. The deal consideration will be close to US$350 million, the largest of its oversea investment so far.

Before this acquisition, Tencent was already an investor in Riot Games during previous round of funding. Other prior investors include Benchmark Capital and Firstmark Capital. The three of them invested US$8 milliion for minority stakes in Riot Games in 2009.

Founded in 2006, Riot Games is based in Los Angeles and its key product is called ‘League of Legends’ (LOL), an MMO battle-arena game. Tencent licenced LOL since 2008 and originally planned to launch LOL last year. In order to improve localisation, Tencent plans to launch LoL in China on open beta test this year.

Riot Games ‘s LoL was launched in Oct 2009 and currently have over 1 million active players logging more than 1 billion playtime minutes each month. Riot Game founding team is also the development team of DotA of Warcraft, the most popular map of Warcraft. DotA is the only RPG map of Warcraft in World Cyber Games (WCG).

Given new funding from Tencent, Riot Games will hire aggressively in 2011 to enhance LoL, expand into new markets and develop new games.

“We forecast Tencent should have US$2.8 bn net cash on hand at end 2011, and thus should have enough resources to support the acquisition,” said Wallace Cheung, analyst of Credit Suisse.

“The deal size is similar to other US social/mobile games acquisition in 2010. In general, we expect the deal should be mildly positive to Tencent, as it implies is expanding its reach beyond China market,” he added.

In local media, Tencent vice president Ren Yuxin said that Tencent has invested in more than 10 game development team, including both domestic and international. But, this is one of the largest overseas investment for Tencent. In May 2010, Tencent spent US$300 million to invest into 10% stakes in DST (the stakes were diluted afterwards).

Anyway, in the near future, financial impact of the deal is still small.
“We expect LoL will be commercialised in 3Q11 and contribute RMB67 mn revenue in 2011, only 0.3% of Tencent overall revenue forecast,” said Wallace.

But besides China market, Tencent would be able to improve distribution of Riot Games products in other developing countries, as they have investment in Russian language countries, Vietnam and Thailand. “Certainly, we are not surprised that Tencent and Riot Games would further develop new titles suitable for China market in the future,” said Wallace.

As any acquisition deal, the key challenge of the deal is how to manage the stability of Riot Games management team after acquisition, as management team would potentially lose incentives after acquisition and will leave the firm after contract expiry.