16 June 2014
By Vin Narayanan
The bwin.party merger was big. This is bigger. On Thursday, Amaya Gaming purchased the parent company of PokerStars.com and Full Tilt Poker for $4.9 billion.
According to the financials released in the statement announcing this deal, the newly combined company had pro forma combined revenue of $1.3 billion in 2013. When bwin.party merged, its combined pro forma revenue was $943.45 million.
But Amaya's acquisition of PokerStars and Full Tilt Pokerrepresents more than the creation of the world's largest publicly listed online gaming company. It's a seismic shift in the business of online poker and a curious end to the era of offshore poker rooms in the U.S.
UIGEA FREEROLLING
PokerStars has dominated the online poker scene for so long that it's almost hard to remember what it was like before it existed. But prior to PokerStars' ascendance, PartyPoker was the king, ruling the online poker universe because it was the biggest and most successful room in the U.S. It had plenty of competition, with Full Tilt, PokerStars, Absolute Poker and a host of others nipping at its heels. But PartyPoker was the undisputed leader -- a publicly traded company that had earned the trust of players and, to a certain degree, legitimized the business to the investor class. Its initial valuation on the London Stock Exchange was $8.46 billion.
PartyPoker's reign was cut short when the U.S. passed the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006. Although the act didn't criminalize online gaming, it did make processing payments for unlawful gambling illegal. The definition of unlawful gambling was muddy at best, though the Department of Justice (DOJ) maintained all forms of online gaming were illegal based on a narrow reading of the Wire Act and the online gaming industry maintained that the Wire Act applied only to sports betting.
PartyPoker adopted a conservative approach to the passsage of the UIGEA and pulled out of the U.S. market with the hope that it could "cleanly" reenter the U.S. when public policy towards online gaming changed. The decision financially gutted PartyPoker. In 2006, one day before PartyPoker announced it would leave the U.S. market, its stock was trading at 107 pence. The day after it announced its exit from the U.S., PartyPoker's stock price plummeted to 45 pence per share, and eventually bottomed out weeks later at 26 pence. Billions of dollars evaporated in the span of a few weeks.
Other publicly listed companies followed PartyPoker's lead and exited the U.S. market. But PokerStars and Full Tilt, which were both privately held, gambled that by continuing to take American players, they could become the dominant forces in online poker throughout the world -- and buy forgiveness from the U.S. when that market opened up. But they were only half right.
CASH DOESN'T SOLVE EVERYTHING
Fueled by their access to the U.S. market -- and the revenue it generated -- PokerStars and Full Tilt went on to dominate the online poker world. But unfortunately for them, banks and payment processors adopted the same conservative approach to online gaming as PartyPoker. As a result, Full Tilt and PokerStars had to resort to trickery -- and some in some cases, outright deception -- to move money in and out of player accounts. And in 2011, the DOJ indicted PokerStars and Full Tilt Poker on a variety of bank fraud, wire fraud and money laundering charges.
Full Tilt went out of business as a result of the indictments. The company had hidden the fact that it was struggling to move money in and out of the system in the U.S. Deposits were being credited to accounts even though money was unable to make its way through the system. It was using player funds to help pay operating costs, and could not return the money to its players. PokerStars, however, had plenty of cash on hand. And it settled with the DOJ, hoping the goodwill generated by its $731 million settlement in 2012 would pave the way to access to a U.S. market that was just beginning to open up. The settlement also included the acquisition of Full Tilt and the ability to pay back all Full Tilt players (eventually) -- which generated even more positive publicity. PokerStars also didn't have to admit to any guilt, which preserved their hopes for eventually acquiring a license in the U.S.
Meanwhile, PokerStars' daily operations didn't take a hit. It became the place to play, and the online poker room easily maintained its top status. From PokerStars' viewpoint: So far, so good. But unfortunately for PokerStars, it underestimated the depth of the animus it faced from the American brick-and-mortar casino industry.
BAD ACTORS
For American casino executives -- and casino companies -- PokerStars accepting U.S. play post UIGEA was a personal affront. The executives went through intrusive investigations into their personal lives, and their families' personal lives, just for the right to access one state in the U.S. Executives and companies that operated in more than one state faced lengthy probes in each market/state they were trying to enter.
PokerStars -- in its mind -- was trying to skirt the system. The American casino industry also worried it couldn't compete with PokerStars -- especially because PokerStars had an "illegal" head start. That fear combined with personal outrage over PokerStars' behavior prompted the American casino industry to fight PokerStars entry in the regulated U.S. market.
Nevada passed online gaming legislation that included a "bad actors" clause, which prohibited companies that accepted U.S. play post UIGEA from entering the Nevada market for five years. California is considering a similar strategy as it considers online gaming legislation. And New Jersey suspended PokerStars' application to provide online poker software in New Jersey because of the company's continuing ties to its founder, Isai Scheinberg.
As a result, PokerStars' efforts to buy forgiveness were on life support.
LAUNDERING A COMPANY
So how do you "clean a company?" You get acquired by one that has access to cash and a good reputation. That's where Amaya Gaming steps into the picture.
Amaya, which is already licensed to provide online gaming software and technology in New Jersey, has been trying for years to raise its profile in the online gaming industry. The b2b software company was founded in 2004. And in 2012, it went on a buying spree that signaled its arrival as a player, buying online game developer Cryptologic ($35.8 million), land-based slot manufacturer Cadilac Jack ($167 million) and poker network Ongame (25 million euros).
The Ongame network was operated by bwin prior to bwin's merger with PartyGaming. But withWSOP.com and bwin.party taking the early lead in the regulated U.S. online poker market, Amaya needed a game changer. Enter PokerStars. If Amaya could buy PokerStars, it would have the online poker product it needed, and the PokerStars platform would have the "legitimacy" it needed to enter the U.S. market. The Scheinbergs added to that "legitimacy" by agreeing to step down after the purchase. Now Amaya just needed the cash to make the $4.9 billion purchase.
THE INVESTOR CLASS RETURNS
The most important element of Amaya's purchase of PokerStars has nothing to do with poker software, players or regulations. That honor belongs to the financing of the deal.
At least $2.9 billion of the purchase price is coming from a combination of investment banks and private equity groups. This massive investment, along with another $1 billion in convertible preferred shares means the investor class believes in the future of online gaming -- and is betting heavily on its future. With online poker slowing down globally, it's a massive bet that the U.S. market is going to grow quickly -- and that Amaya is the correct steward to bring it into the U.S.
A CLOUDY FUTURE
But just because Amaya bought PokerStars, it doesn't mean PokerStars "is back." There are too many major questions to be answered to make that declaration. First, Amaya is a b2b provider. Is Amaya going to switch its strategy and become a b2c provider? If PokerStars remains in the background, can it succeed as "just a supplier?" Or is its marketing and operations savvy critical to its success?
How will the two companies merge? Will Amaya's corporate culture slow down the hard-charging PokerStars? Will American casinos trust Amaya enough to form a partnership? Or will the casinos be suspicious of that large b2c presence globally?
And what will regulators think of the merger? These are major issues that need to be addressed before anyone can say PokerStars "is back."
Even if PokerStars ends up in front of American consumers in the near future, it won't be the same product that they grew accustomed to prior to 2011. The player liquidity pool will be restricted to the population of any given state, so the days of "any game, any stake, any time" are gone. The revenue model will be different as well. With fewer players, and less money coming in, Amaya will have to be more judicious about spending money to acquire players. And which casinos will partner with Amaya? Will the PokerStars brand be able to help a "second-tier" casino succeed online? Or will a well-run poker room by top-tier brands triumph?
It's a different poker world that PokerStars is returning to. Players are going to have to adjust their expectations. And Amaya might have to as well.
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