А Close Look at DraftKings’ Acquisition Attempts and Failed Bid Implications

Author: Matthew Haynes

Without a doubt, one of the biggest monopolies in the world is the gambling industry, something that has steadily been proven over the last few years and now, more so following the global pandemic, which appears to have expedited many more deals since.

There are multiple gambling companies in the industry, some of which are essentially monopolies themselves, with numerous sub-corporations and brands, even that are joint ventures with competitors.

In some cases, gambling conglomerates have got their acquisition strategy right, evolving into behemoths, doing their due diligence intelligently, identifying hidden value, and ultimately paying the right price.

The world of merger and acquisition (M&A) essentially is an art form, and it can make or break a firm’s reputation, regardless of the industry, though the gambling sector has proven to be one of the most competitive and equally unforgiving niches in the world of business.

The companies that master this often have a world-class acquisition team in place, responsible for identifying, researching and even negotiating appropriate deals that make sense for their company. Often, they work closely with their investment bank of choice, ensuring that every box is ticked for a deal to successfully close.

Arguably one of the biggest, Entain (formerly GVC Holdings), appears to have lit the blue touch paper over the last few years when it comes to acquiring new brands; they seem to have mastered the art. We will come back to this later.

However, and perhaps surprisingly, one company that has struggled in this realm is a major player in the ever-growing US online gambling market. DraftKings, considered by many to be one of the most notable online gambling brands in the US - and certainly, one of the oldest has demonstrated what many industry insiders consider to be a significant lack of judgment.

There is no questioning the company’s ambition. Led by luminary Jason Robins, the Boston-based company has gone from strength to strength over the last decade, essentially (and initially) dominating the US fantasy sports niche alongside rivals FanDuel.

Both firms even showed astute timing to take their brand strength and develop their own sportsbooks and live casino when it became apparent that online legislation would be passed in the first states to become regulated.

For all intents and purposes, it seemed as if both DraftKings and FanDuel would dominate the US online gambling scene for a long time, leveraging their history in order to build on good work.

While FanDuel’s reputation seems to be unblemished (having not shown any lack of judgment), many in the industry may consider DraftKings to have made some rash moves.

DraftKing's Failed Bid for Entain - Chess Move Gone Wrong?

In January 2021, the industry looked on as MGM Resorts International submitted an $11 billion bid to buy Entain, incidentally a firm with which it has a 50 percent joint venture with BetMGM.

Certainly, it was a gamble, though perhaps one that made sense; however, the due diligence came up short. Entain CEO; Jette Nygaard-Andersen and a seasoned power broker in her own right, dismissed the bid immediately as “too low”, showing zero encouragement for a follow-up offer and, seemingly, a refusal to negotiate further.

The logic from MGM’s side was there, the execution wasn’t. It perhaps may have been apt to suggest a takeover in full of BetMGM first, to then lay the groundwork for more potential future deals.

It seemed that more than six months later, lessons had not been heeded. This became apparent when DraftKings launched a mind-blowing bid of $22.4 billion for Entain in its entirety before swiftly pulling out of the deal, which appeared to offer a glimmer of hope following a short, succinct reply from Nygaard-Andersen, simply: "The board of Entain will carefully consider the proposal."

Whether Entain would have accepted in the four-week timeframe is something that not even the most dedicated of analysts could guess. However, DraftKings did make a number of mistakes.

Seemingly thinking that making an unprecedented acquisition offer (in the history of the gambling industry) would be enough to sway a sale apparently demonstrated its lack of confidence from the start when it pulled the offer.

Its stock price started to plummet as the market, for all intents and purposes, began to mirror the brand’s lack of confidence in itself, portrayed by its apparent indecisiveness.

Also, the question has to be raised; ‘to what extent did it consider how much MGM might try and play hardball with Entain over the deal?’

This alone must have made DraftKings realise from the beginning, that this, quite simply, was a non-starter, regardless of the fee on the table. It is also understood that this is one of the reasons why it walked away.

In some ways, it might be forgiven. Its bid for Entain came just one week after it made a $1.6 billion bid to buy rival Golden Nugget. However, riding high on the crest of a wave, there are suggestions that this was a reactionary response to this successful, and also, logical offer.

Whether it was misplaced arrogance, lack of judgment or poor preparation, the upshot is, the company bit off more than it could chew, and the decision backfired.

Everything about its deal for Golden Nugget made sense. It was carefully thought-through, and you could recognize a clear strategy that would benefit both brands via planned partnerships moving forward - we revisit this further down.

There had been suggestions that MGM would do everything in its power to make life difficult for both parties following this bid because it would have meant that it would share BetMGM with one of its biggest US rivals.

This is where it gets complicated and certainly suggests that this bid, more than anything, was impulsive, if not even a little bit reckless.

Implications of a Successful Bid

From a hindsight perspective, let’s just say that Entain accepted the bid, and each party (including MGM) came to an agreement. While on paper, it would have looked great for DraftKings - making it potentially the largest gambling firm in the world, this would likely have caused a significant number of issues.

At the time of the bid, representatives of the state of New York had announced that the online sports betting market would be regulated, with this ready to launch in January 2022.

Every US gambling firm was vying for a position in what was predicted to become the most lucrative market in the country. Preparation was paramount for this, the ultimate arms race in the industry.

There is an argument that had the deal for Entain gone through, this could have caused significant problems, with the company’s executive committee having to divert its attention and spread itself across over 24 different brands. Regardless of which key personnel from Entain stayed on board.

As it turns out, this was even more of a blessing in disguise. Results following the brand’s first month in the New York market revealed that it had overestimated its acquisition strategy when compared to its rivals, ultimately witnessing its share price drop even further.

Having the distraction of being in control of a company the size of Entain could well have made matters even worse.

The PointsBet Fiasco – What Really Happened

When Australian firm, PointsBet announced that it was looking to offload the US arm of its business, this presented a great opportunity for any major US operator to add a substantial amount of revenue to its balance sheet.

Fanatics raced out of the blocks immediately, almost coming from left-field to register concrete interest and a major signal of intent with a bid of $150 million, which was swiftly accepted.

With the deal looking like it was all but closed, DraftKings swooped with an “11th-hour bid” of $195 million, which was a strong play, seemingly appearing as though it was right back in the game.

How this deal did not close is likely to haunt Robins and company for a good while. What is likely is that DraftKings thought it had done enough, not expecting Fanatics to counter with a second bid worth $225 million; pocket change for a company like DraftKings. While it was contemplating a response, the deal closed, representing a major setback.

DraftKings could have easily blown Fanatics out of the water and should have done. This wasn’t about adding to its market share; the goal should have been to do everything possible to prevent another competitor from entering one of the biggest markets in the world.

It is now expected that Fanatics, with its PointsBet US asset, will be a major rival, perhaps with the potential to unseat DraftKings from its number two position (behind FanDuel), while the threat from BetMGM is also very real.

There is also the suggestion that DraftKings has lost a substantial amount of credibility, having failed to agree on what appeared on paper to be a straightforward transaction.

Successfully acquiring PointsBet USA would have seen DraftKings’ stock price propel, signaling confidence in the market about its brand, with a significant improvement in its position and perception among consumers.

In March this year, the company reported that it had a $1.1 billion surplus available in cash, and even offering half of this would have been an effective ploy. It would not only have prevented further competition but also strengthened its position, allowing them to potentially take on (and edge ahead of) FanDuel.

Indeed, following its bid for PointsBet, Robins was also seemingly aware of the possibilities, stating: “While we continue to focus on operating more efficiently and driving substantial organic revenue growth in the United States, we will also look to prudently capitalize on compelling opportunities at attractive valuations, as is the case with PointsBet’s U.S. business. We believe DraftKings is uniquely positioned to submit this superior proposal due to our scale and corresponding ability to generate meaningful synergies from the acquisition.”

Meanwhile, even CFO Jason Park, who rarely comments on such issues, revealed his confidence: “We are excited about the potential synergies available by acquiring PointsBet’s U.S. business, including offering our customers interesting new bet types and accelerating our roadmap of bringing in-house more of our mobile sports betting technology.”

However, likely as with most of those in the know, even Fanatics CEO Michale Rubin was well aware of what DraftKings was attempting: “We are sceptical of the DraftKings proposal, which seems like a desperate move to slow down Fanatics and PointsBet from completing the deal as the purchase price, and other financial commitments will total more than $500 million – so they are using the majority of their projected year-end cash just to try to block us.”

What Comes Next for DraftKings?

It will be interesting to see where the company goes from here, and there will need to be many questions asked about its internal acquisition strategy over the last couple of years and how they approach deals.

There is no doubt that it would have forfeited a certain amount of credibility in the marketplace, whether this refers to a lack of judgment or the wrong strategy when it comes to attempting acquisitions.

With the start of the new National Football League (NFL) season just weeks away, this certainly represents an opportunity to come out of nowhere with an ingenious marketing strategy. However, it knows that it is up against stiff competition across multiple states.

It may be that it focuses on its core products for the next 12 months before thinking about another acquisition of the same magnitude, though smart deals that help to increase the efficiency of its operations, such as for small technology companies, may just prove to be the most sensible way to go.

What can be encouraging for the brand, which would help to give it some credibility in the market, is that it had one of the best Super Bowls in 2023 out of all of its rivals, with its site suspended for the fewest number of seconds according to a report by Usability Digital. This certainly could provide customer confidence going into the new season and help with the acquisition.

Though it will be concerned that its acquisition model needs some work, and it will likely be focused on addressing this sooner rather than later.