Uncertain future: here’s what THQ’s bankruptcy means for the company and its lineup of games
Update: Regtocomment did a great job of laying out where they think we got the analysis wrong on this post, and provides some great information. Be sure to check out his or her thoughts in the comments, it’s fascinating reading.
THQ, publishers of games like Saints Row The Third and the upcoming South Park: The Stick of Truth, filed for bankruptcy on Wednesday, December 19. After a troubled fiscal year and a controversial Humble Bundle, it looks like THQ is done for.
Or is it? There’s a lot of confusion about THQ’s bankruptcy and what it will mean for the company, its employees, and its upcoming games, so we wanted to break this down in plain English. Here’s what really happened.
Homework: Read Chapter 11
First, let’s look at the type of bankruptcy THQ has filed, a Chapter 11 bankruptcy. There are many stipulations and rules to Chapter 11, but what we should note is that it allows a debtor to retain control of business operations, even after it is “sold.” General Motors, Chrysler, and Delta Airlines have all filed for Chapter 11 in the past, yet they continue to exist with almost no noticeable difference to the average person.
Chapter 7 bankruptcy is what happens when a company is liquidated, as was the case with Curt Shilling’s 38 Studios. 38 Studios owed more than $150 million in creditors, but had no more than $50 million in assets, as reported by the NY Times. So that’s good, right? We don’t have to worry about THQ going the way of 38 Studios? Not quite.
Midway also filed for Chapter 11 bankruptcy in 2009. One year later, they submitted a liquidation plan. Although the company still technically exists, it’s only while they continue to sell off assets and proceed according to that plan. Midway’s Chapter 11 filing was plagued with lawsuits and problems, and it’s possible that contributed to the studio’s liquidation, but it’s hard to know for sure. What’s important is to note is that nothing is certain until it’s happened, and THQ’s filing hasn’t quite been completed yet.
The long story made short: It’s not as bad as it could be, but things can always get worse.
Looking a gift horse in the mouth
But wait, didn’t Clearlake Capital purchase THQ already? At first glance, it certainly seems that way. Jason Rubin, the president of THQ, tweeted that there was “Commitment from Clearlake Capital to buy the business,” and a cursory Google search shows several forums and blogs re-posting the news with headlines that likewise imply Clearlake has bought the company. They haven’t.
Clearlake Capital is an investment firm. They facilitate investment, which is what’s happening here. We don’t actually know who is putting forth the money to finance THQ. All we know is that they are “affiliates” of the company, and that they’ve put forward a substantial amount of money - $50 million, with an additional $10 million promised to THQ’s creditors - to keep THQ up and running.
It’s also important to note that Clearlake Capital – and again, remember they’re not the ones buying THQ – are only the first bidders. They are what’s known as a “stalking horse bid.” So what’s a stalking horse? First of all, it’s a funny name, very Assassin’s Steed. Second, it means that they were chosen by THQ from a pool of potential buyers. A stalking horse offer prevents low-ball bids by setting the chosen offer as the minimum price for sale.
What matters the most here is that while THQ has obtained “commitments” from Clearlake, those commitments will only be held to if Clearlake still holds the highest bid at the end of the sale. THQ has asked the court for 30 days to complete said sale. During that time, other interested parties can still bid. I suspect they not only can, but will.
It’s hard to imagine other publishers not being interested in at least some of THQ’s assets; Any publisher should be happy to have the selling power of Saints Row, which moved almost 4 million units worldwide in two months, EA could always add pro-wrestling to their repertoire of sports titles, and Ubisoft might enjoy adding some more American perspectives to their company as they continue to expand. It’s anyone’s guess, really.
So what about the games?
Rubin posted a public message on THQ’s website a day after the filing, detailing in his own words what will be happening to the company. This includes the plans regarding THQ’s upcoming games. “Rest assured that the goal throughout the sale process has been to preserve our teams and our products,” he wrote.
The key word here is “throughout.” Day-to-day operations will not be affected while the sale is still happening, but beyond that, no one can honestly say. If Clearlake Capital’s unknown affiliate wins, they have apparently promised funding which will allow for completion of THQ’s slate of titles.
If someone outbids them however, they can do as they please. The yet-unannounced games in development at Vigil, Turtle Rock, Relic, and THQ Montreal, which you can see on the second-to-last page of THQ’s filing, might be closed down. After lackluster sales from their initial titles, games like Metro: Last Light and Homefront 2 may be sent to development hell to languish without a publisher. These possibilities are not happy ones, but it’s more honest to say “we don’t know” than to assume games are safe. We can say they have a stay of execution, and we’re hoping for the best.
None of this is meant to scare you – it’s likely that, given how far along Last Light‘s development is, it will survive, and Homefront, while received with mixed reviews, was still profitable. What’s really going to matter here is South Park and the upcoming Saints Row sequel.
Michael Pachter of Wedbush Securities stated that even the more sure-fire hits are under pressure. Both will have to sell in the 2.5 million – 3 million range to keep the company going for another year, he predicts. But, “if South Park and Saints Row sell 300,000 units, these investors are going to lose their money,” Gamasutra reported.
The takeaway of all of this is that while THQ executives and PR will try to put a positive spin on the bankruptcy proceedings, nothing is certain yet. We don’t know who’s offered up the initial bid, we don’t know who else is interested, we don’t know how THQ business operations will proceed. We have information that can lead us to speculation, but that’s it.
Anyone who says otherwise is selling something; a once-successful video game publisher, perhaps.