Ubisoft's Struggles: A Cry for Change

The corporate history of Ubisoft has been marked by battles against takeover attempts, starting from its IPO almost thirty years ago. Initially, it was a European distributor for other companies' games, but soon it became a major publisher and developer of its own titles, attracting the attention of larger companies seeking to grow through acquisition. In 2004, EA bought almost 20% of the firm, which Ubisoft executives feared was a prelude to a hostile takeover attempt. EA ultimately sold its shares in 2010, but Ubisoft faced another serious takeover attempt from Vivendi, with the founding Guillemot family engaging in a three-year corporate battle to prevent Vivendi from gaining a controlling share. The company's share price graph reflects the impact of these battles, with a significant decline in recent years. The pandemic-era spike in valuations for games companies was short-lived for Ubisoft, peaking in early 2021 and tumbling since then. The latest stumble came with the commercially disappointing launch of Star Wars: Outlaws. Looking back, Ubisoft's high valuations in the years leading up to 2020 were largely due to the corporate battle with Vivendi, which inflated the share price. The Guillemot family's efforts to increase their shareholding and voting rights, combined with Vivendi's attempts to acquire more shares, led to a significant price increase. However, this inflation was not sustainable, and the company's share price has since regressed towards the mean. Ubisoft's performance in subsequent years has been poor, with the company's valuation now similar to what it was in 2015 when Vivendi first started its bid. Investors have seen little to no return on their investment, with some losing nearly 90% of their value. The recent valuation slides, following the disappointing launch of one of the company's key titles, have added insult to injury. The arrival of an activist investor demanding that Ubisoft offer itself up for takeover by a private equity company may seem like a familiar challenge for the company's leadership. However, this is a far preferable fight to the internal soul-searching Ubisoft needs to do about its poor commercial performance and management of its development pipeline. The open letter from the activist investor is amateurish, with a surface-level understanding of the games business and a prescription that is essentially the same snake oil offered as a corporate cure-all – selling out to private equity, slashing headcount, and selling off assets. This approach would ultimately lead to the collapse of the company. Despite the letter's flaws, the core thesis that Ubisoft's ailments are bad and showing no sign of improvement is correct. The company underperforms its publisher peers in terms of commercial success, with poor bottom-line financial numbers, revenue-per-headcount, and commercial performance on a per-title basis. Ubisoft has a solid set of well-known IPs, but it has consistently struggled to translate that into serious commercial success. Attempts to develop new IP have not gone well, with projects like Skull & Bones and XDefiant failing to hit commercial targets. The company lacks a money-printing machine, a business pillar that reliably churns out large amounts of cash year after year. Most of Ubisoft's strategic decisions make sense as attempts to find such a business, but these attempts have generally been poor. Ubisoft does have success stories, but investors are right to think that performance could be better. The company is bloated, with a high headcount compared to rivals, although this is partly due to its philosophy of keeping development in-house. However, even considering this, Ubisoft fails to generate revenues on a per-employee or per-game basis that compare to rivals, suggesting a problem at a high level within the company. Decisions made at an executive level are failing to focus the company's efforts effectively, with games being made en masse and thrown at a wall to see what will stick. This reflects a failure to utilize resources productively and make smart decisions about the product pipeline. The ultimate arbiter of editorial decision-making at a publisher is the CEO, especially a founder-CEO who has reigned for over 30 years and whose family wields significant power within the company. Yves Guillemot has fought hard to stay at the top of Ubisoft, but investors are right to question whether he has the skills and insight required to direct a product slate or make good strategic decisions. The cure offered by the activist investor is far worse than the disease, and selling out to private equity would be the death knell for Ubisoft in the medium term. Ubisoft remains an important part of the games industry landscape, and its health and management are crucial for the industry's well-being. However, achieving a healthier and better-managed state may require real change at the top of the company. After a series of revelations in 2020 exposed an abusive culture encompassing many senior staff, Ubisoft's leadership was hollowed out, but Guillemot remained in place. Since then, the company has pivoted to a focus on mobile and F2P, then to an ill-advised commitment to blockchain, all while its product lineup has looked increasingly in need of effective editorial oversight. With such a powerful CEO, there's only one desk for the buck to stop on. Yves Guillemot has devoted much of his life to building this company, but investors and stakeholders are justified in asking whether he's still the right person to lead it through its current challenges.