GREE Is Good: How PerBlue Sold Its DragonSoul to Japanese Firm

Earlier this month, PerBlue, a Madison, WI-based developer of games that can be downloaded and played on mobile devices, said that it had sold the rights to one of its games, DragonSoul, for an undisclosed sum.

The buyer, San Francisco-based GREE International Entertainment (GIE), is part of GREE, a Japan-based company listed on the Tokyo Stock Exchange.

According to a press release GIE put out on Oct. 6 announcing the deal, the only PerBlue asset that changed hands as part of the transaction was DragonSoul. “PerBlue’s current team will continue to create brand new games and support previously developed games that are not part of this acquisition,” GIE said in the release.

But from there, things get a bit murky. Key pieces of information—such as the amount of money that changed hands, and the structure of the deal—were not included in the announcement.

GIE’s press release did not say anything about either company forming new business entities prior to, or as part of, the DragonSoul deal. However, GIE’s acquisition of the game actually involved the purchase of an entire company. And according to an accountant who has guided businesses through mergers and acquisitions, the deal was structured in a way that is desirable to the seller from a tax standpoint, and allows investors seeking to get some cash from the buyer—rather than stock in the acquiring company—to do so.

Bill Pescatello—a member of PerBlue’s board of directors and partner at Chicago-based Lightbank, which has invested in the game maker—said in an e-mail that all PerBlue assets, excluding DragonSoul, were “spun out” into a new company before PerBlue officially sold the game to GIE.

Forrest Woolworth, PerBlue’s chief operating officer, confirmed Pescatello’s account, also via e-mail. Excluding DragonSoul, the company’s employees and all of its assets were transferred from PerBlue, Inc.—its previous legal name—to a new entity called PerBlue Entertainment, Inc., Woolworth said. (Going forward, the company will operate as PerBlue Entertainment, Inc.)

Since DragonSoul was the lone asset of PerBlue, Inc., following the spinout, there is little practical difference between purchasing the game itself and purchasing that entire entity. That is what GIE ended up doing: according to a document that by all appearances is on file with the Tokyo Stock Exchange (click here for an English translation, via Google), GIE acquired PerBlue, Inc., for “about $28 million” in cash. (The Milwaukee Journal Sentinel reported, citing sources at the companies, that on top of the $28 million paid in cash, GIE made a $7 million debt payout, bringing the total price to $35 million.)

Xconomy asked the Japan Exchange Group, which operates the Tokyo Stock Exchange, to verify the authenticity of the document. In response, an administrator for the group replied, by e-mail, “Companies [listed on the Tokyo Stock Exchange] disclose their corporate information at their own responsibility.”

Justin Beck, who co-founded PerBlue in 2008 and serves as CEO, declined to discuss financial details of the transaction when reached by phone. “None of the deal terms were disclosed,” Beck said. “I can make no comment on any of the terms, at all.”

Amanda Taggart, a spokeswoman for GREE, declined to comment on GIE’s purchase of DragonSoul beyond what the company said in its press release.

The document filed with the Tokyo Stock Exchange offers a rare glimpse into the financial performance of a privately held startup.

For instance, it contains a table showing the shareholders of PerBlue, Inc., and the size of their stakes before the two sides completed the deal. Beck is one of two individuals listed in the ownership table, along with chief technology officer Andrew Hanson, who is the company’s other co-founder.

ShareholderStake in PerBlue, Inc.
Innovation Group Investors, LP21.9%
Andrew Hanson (PerBlue CTO)19.7%
Justin Beck (PerBlue CEO)18.9%
Golden Angels Perblue Investors, LLC14.4%

The two representatives of Innovation Group Investors named in the document are Eric Lefkofsky and Mike Mauceri, both of whom are listed as Lightbank executives on that organization’s website.

Brookfield, WI-based Golden Angels Investors has invested in PerBlue in the past. Tim Keane, who directs the group, said that “by looking at registration statements, you begin to see there are old entities and new entities. You begin to see that the entities have shifted around.”

Keane is likely referring to the creation of PerBlue Entertainment, Inc., and transfer of all non-DragonSoul assets into that entity from PerBlue, Inc. There appears to be no mention of PerBlue Entertainment, Inc., in the Japanese document, which jibes with GIE’s statement that it only acquired DragonSoul, and the rest of PerBlue remains intact. None of the four PerBlue, Inc., shareholders listed in the document returned messages asking them to confirm the size of their holdings.

Provided that figures in the document are accurate, it is not clear who owns the remaining 25.1 percent of shares. They could belong to other PerBlue investors and employees, as it’s common for startups to create stock options plans for their workers. Presumably, the four shareholders listed in the document are the company’s top shareholders.

According to the document, GIE’s acquisition of DragonSoul was structured as a reverse triangular merger, also known as a 368(a)(2)(E) reorganization.

In a reverse triangular merger, the acquiring company creates a subsidiary, which then merges into the target company. According to the Tokyo Stock Exchange document, in the DragonSoul deal the target company was PerBlue, Inc. (which consisted only of DragonSoul assets), and the merger subsidiary created by GIE was called Parrot Merger, Inc. The result of this type of reorganization is that the target company survives the merger. Following the transaction, it operates as a subsidiary of the acquirer, which owns the target company’s stock.

Tony Nitti is a partner at the accounting firm WithumSmith+Brown, and has written for Forbes on some of the various types of mergers available to companies. (He wasn’t involved with the PerBlue deal.) He said there are a few different factors that typically lead businesses to structure acquisitions as reverse triangular mergers.

First, Nitti said, the two parties may wish to structure the transaction to be tax-free. Second, the acquirer may wish to keep the target company alive if, for example, it has ongoing contracts or other non-transferable assets, he added.

Nitti said that both of these criteria could be satisfied through a 368(a)(1)(B) reorganization, which is often referred to simply as a “B” reorganization.

However, he said, “The problem with a B reorg is… you can’t even give a penny of cash to the selling shareholders, or else the entire transaction becomes taxable, not just the penny in cash that you gave them. That’s not very appealing to a lot of sellers because they usually want some measure of liquidity from their deal.”

So, when the seller has shareholders who wish to get some cash out as part of the acquisition, the two sides may opt to structure it as a reverse triangular merger, Nitti said.

Keane, the Golden Angels Investors director, said it’s no secret that when the time comes to make a deal, business executives and investors often seek out the most desirable tax terms.

“People that buy and sell companies are looking for favorable tax treatment,” he said.

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