Aristocrat—VGT: Anatomy of a Merger

The new Easy Money Class II WAP marks the first fruit of collaboration between VGT and Aristocrat since the Australian company closed on its VGT acquisition last October.

In the midst of megamergers involving the world’s biggest slot makers and lottery companies, Aristocrat Leisure Ltd. last year cut a deal worth nearly $1.3 billion to acquire Video Gaming Technologies, a Tennessee-based company specializing in Class II gaming.

While it generated some buzz, it flew somewhat under the radar compared with the goliath mergers of IGT and GTECH, and Scientific Games and Bally Technologies.

The strategic acquisition already has given a boost to Aristocrat’s bottom line with the company’s strong results for the first half of 2015, but beyond that, the transaction also has shown that a significant merger can be carried out without the churn and euphemistic “synergies” that often follow such acquisitions.

“We’re very proud of the result,” said Jamie Odell, Aristocrat chief executive officer and managing director. “I think there’s a number of key things in there. First is the successful completion of the VGT acquisition. It’s a great business. We took it over the 20th of October, and it’s been performing extremely well.”

Aristocrat had no Class II presence, so acquiring VGT, with its market-leading footprint in Oklahoma, made sense, Odell said. “It’s actually very accretive, so culturally it’s very easy to go in and continue to grow the business,” he said.

Odell cited several additional highlights contributing to the company’s strong half-year results, including Aristocrat’s market share-growing results in Australia; market-leading strength in Asia-Pacific; strong showing in U.S. gaming sales and operations; and the upward-trending performance of the company’s social and digital operations.

Whatever Aristocrat’s doing appears to be working, according to Todd Eilers, director of research for the quarterly Eilers-Fantini Slot Survey. In the most recent survey, covering the second quarter of 2015, Aristocrat had seven of the top 10 most-anticipated games.

“We just met with a number of slot directors in Las Vegas and Aristocrat was universally cited as having the best product offering right now,” Eilers said. “They clearly have the most momentum of all the suppliers and are taking share in game sales and gaming operations. They have strong content, innovative new cabinets and platforms, and have started to expand outside of their traditional gambler-type products into the entertainment-style games.”

While the strong performance in the Class III market isn’t related to the VGT acquisition, Eilers said, “I think there are some opportunities longer term for Aristocrat to take VGT’s mechanical reel expertise and apply that in a Class III market, and there is an opportunity for VGT to take some Aristocrat content and place it into the Oklahoma market.”

Eilers gave credit for much of Aristocrat’s success in Class III markets to strategy changes the management team implemented a number of years back, including bringing on top slot talent including Joe Kaminkow and Dan Marks. “It typically takes about a year or two to get to the point where the content comes out. That first and second wave of content—it’s really resonating with the customers. I think that’s kind of where the market share gains are coming from.”
Aristocrat’s new Double Arc cabinet hits slot floor this month. It debuts the game theme “Britney,” which features a unique wheel and video clips of the pop star performing her best-known hits.
Share-taking Strategy
Aristocrat has been taking major steps forward in its “product-led, share-taking strategy,” and focusing on driving scale and profitability in critical recurring revenue segments, Odell noted. He said the company was particularly proud of the U.S. results, he said, noting the U.S. replacement market is down—“so we grew share in a declining market.”

“The fact is the market really hasn’t recovered since the global financial crisis,” and so Aristocrat has adjusted to this market reality, Odell said.

“We said a long time ago that we have to focus on the things within our control and not on a rising tide in the market overall, and we set out to do that particularly by producing great content,” Odell said. “We have a set of studios producing what I think is market-leading content. If you take our key markets of the U.S. and Australia and in Asia, we continue to grow share and focus on delivering great content.”

With Aristocrat’s strong Class III performance and the complementary VGT Class II business, the company has been up to the challenge, and Aristocrat’s Oasis 360 systems business also plays a major role in helping create experiences that make the overall experience more engaging for players, Odell said.

Collaborative Congeniality
Integrating a newly acquired company tends to create anxiety among employees, but Aristocrat from the start made it clear that layoffs and other cost-cutting measures were not part of the deal.

“I think people always have a little bit of concern, but I believe we did a good job of making people feel OK about what’s going on,” Aristocrat Chief Product Officer Rich Schneider said. “We communicated to both teams that this wasn’t about costs and cost-cutting. We paid a lot of money for a great company and the last thing we would want to do is dismantle it. And if you look at what we have done since taking ownership of VGT, we have been true to our word.”

It was an easy story to tell, according to both Schneider and VGT President Jay Sevigny. “A lot of times when people talk about mergers, it’s how do we collapse this and how do we combine that,” said Sevigny, who came on board in February and who had served as VGT chief operating officer from 2006 through 2011. “The interesting thing is we lead Class II, and Aristocrat wasn’t in Class II. We lead the stepper segment in our market, and they lead the video segment of the market. VGT has had a challenging time developing successful video product, and that’s really the next big opportunity for us. So, when you take a look at the product categories for each company, they’re very complementary, very synergistic.”

Basketball great Kareem Abdul Jabbar and Aristocrat CEO Jamie Odell flank the new Behemoth slot cabinet at the 2015 NIGA show, the first exhibition where Aristocrat and newly acquired VGT shared the same booth.

Once the deal closed, one of the first tasks was to build a common culture around both organizations—a task made easier by the fact that the companies’ existing cultures were quite compatible, Schneider said.

“Our values are courage, passion, integrity, respect, and theirs were virtually mapped into ours. They had a great culture on quality and providing great service, and so for us it really fit together,” he said.

VGT, under previous owner Jon Yarbrough, has created a strong culture that is very service-focused, very employee-focused with strong values toward developing people internally, Sevigny said. “Aristocrat is very similar and Jamie Odell, the CEO of Aristocrat, in my opinion is the best CEO I’ve ever worked around. I think the sheer leadership that Aristocrat is now bringing to VGT is wonderful,” he said. “VGT found itself right in the lap of a wonderful company with a culture that is very compatible with ours and very committed to making sure that we continue that growth.”

Schneider learned much about VGT and the unique aspects of its operations while taking on the interim VGT president title, along with his current Aristocrat title, until Aristocrat hired Sevigny.

“Because I’m the product guy here, I was able to drive the search for product synergies, and I was able to do that by understanding the unique aspects of the Class II realm,” Schneider said. “It was a great learning experience for me that I could take back to the product organization and then take that into their games and understand their capabilities, and that was exciting because we found out they had a top-notch team.”

The next step was determining how to best leverage VGT’s and Aristocrat’s technologies, Schneider said. “The teams got together and they decided what would be the best technology to carry forward,” he said, “so for example, VGT had wanted to do a WAP for quite some time, but it was a pretty heavy technology lift for them. We happen to have a WAP, so we were able to very quickly prototype that, put it together, and we’ll actually launch it at OIGA, and that’s been very, very well-received by customers. That’s just one example of us looking at our technology and figuring out what’s a win-win for both companies.”

Creating that collaborative effort involving both teams is important, Schneider said. “When people have a say in what’s going to happen, I think they’re much more excited about being a part of it and seeing it become successful,” he said. “It’s a great example of the fact that you can bring both organizations in, and each organization has its own strengths, and we can leverage those together and one and one equals three.”

Sevigny sees much promise for the new WAP. “The wide area progressive is a product that VGT had wanted to get out for as long as I can remember going back to the early 2000s, but for various reasons could never get that done,” he said. “Then Aristocrat acquired VGT, and now it’s going to be in the market nine months after the closing date. That’s fantastic, and it was made possible for a lot of reasons including that Aristocrat technology on the product side.”

Sevigny said the Oklahoma market already is responding well to the WAP, for which installations began in early July. “The great thing about this is it’s a wide area progressive that can go outside the Oklahoma market as well,” he said. “We’re going to have the force of Oklahoma driving the coin-in and the meters, but we’re going to have installations in Washington state where we’re going to be able to offer life-changing jackpots in a Class II market, which is really fantastic.”

Sevigny also is enthusiastic about Aristocrat’s ability to help VGT create new video product. “That is an area where Aristocrat is going to have one of the greatest impacts in helping VGT access new markets,” he said. “One of the constraints for VGT in prior years was the inability to create new market-specific product, and so we went into markets, and we went into markets with product that had been successful in Oklahoma,” but didn’t prove popular in other markets, such as Mexico.

Aristocrat’s Lightning Link standalone progressive jackpot product, already wildly popular in Australia, is making its debut in the U.S.

“But now with the capabilities we’re gaining with Aristocrat and Rich Schneider, who’s probably the best in the business with driving new product development, we’ve got the force of five different studios around the world that are able to develop games for Aristocrat and VGT,” he said. “We’ve never had these kinds of capabilities before so now we have the capabilities to develop for any Class II market in the United States.”

Schneider said the two companies have a number of other initiatives underway. “We’re trying to look ahead at how to combine the best of both worlds,” he said. “We’re very excited about the strengths of the bingo math combined with the strengths of the Aristocrat DNA on how to create great gambler game content in that space.”

Sevigny said he sees other areas where Aristocrat can leverage VGT’s expertise.

“One of the things we’re doing now is we’re working closely with Aristocrat to offer both VGT and Aristocrat product to our traditional Class II customers in a single offering.  This simplifies and enhances their buying experience and strengthens our relationships even further.”

Going Big
With the merger as a backdrop, Aristocrat and VGT are readying to “go big” at this year’s Global Gaming Expo at the end of September.

In addition to VGT’s new wide area progressive and other Class II products, Aristocrat will showcase its new gaming hardware, including the ginormous Behemoth cabinet and the Arc Double cabinet, along with a bevy of new or recently released licensed games based on entertainment themes, such as “Britney Spears” and “The Big Bang Theory.”

Other games based on licensed brands include games based on HBO’s “Game of Thrones,” and perennial holiday film favorite “A Christmas Story.”

A game based on the megahit TV show “The Big Bang Theory” will be featured on the Behemoth cabinet.

“The big thing for us on the horizon is about the next wave of new cabinets,” said Matt Wilson, Aristocrat senior vice president of sales and marketing for the Americas.

The Behemoth and Arc Double have just been released, and Wilson said the company already has had plenty of interest from casino operators.

The huge Behemoth features an 84-inch, 4k-resolution display, Wilson said. “We spent a lot of time focusing on making sure the aesthetics of the cabinet itself were really nice,” he said. Aristocrat had noticed a lot of large cabinets in the marketplace today, but a lot of them are very boxy with little attention paid to industrial design, Wilson said, noting that the company went to the same industrial design firm that did Aristocrat’s upscale-looking Helix cabinet. “It’s just a very elegant-looking cabinet,” he said. “I think when you compare this to a lot of other large-format cabinets in the marketplace, the quality of the screen is vastly superior. The 4k resolution display is important because when you blow these images up you don’t want to lose the quality of the graphics themselves so it doesn’t pixelate the image.”

In addition, Aristocrat put in a rumble sound chair with high-end speakers and a rumble feature. “With both the Behemoth and Arc Double, what we’re trying to do is create very unique experiences because whether casino operators like it or not, they’re actually in a war of convenience,” Wilson said. “They’re competing with all these different ways that people can spend their discretionary income.”

In response, he said, “We try to create cabinets and configurations that create experiences that, frankly, people just cannot get anywhere else.”

The first two games released on the cabinet are the tried-and-true Buffalo Stampede and The Big Bang Theory based on the hit show of the same name. The company also will offer many back-catalog games as well, including the original Buffalo game and Dan Marks’ Entertainment Series games such as Sky Riders.

Aristocrat’s Arc Double joins other manufacturers’ entries, such as Bally’s Pro Wave, in the curved-screen game arena. “We decided to take it to the next level,” Wilson said.

The cabinet features a 42-inch curved LCD screen, with another 42-inch curved LCD mounted on top. “It gives you game play that you just cannot experience on another cabinet,” he said.

Aristocrat is launching the Britney Spears game on the Arc Double cabinet.

Wilson said the audience for Spears’ music crosses the demographic divide, and Aristocrat believes that will also hold true for the game, which features video clips of Britney performing five iconic songs, and a unique wheel feature.

Seeing the cabinets and themes finally reach casino floors is gratifying, Wilson said.

“It’s exciting because we’ve been talking about this for such a long time. The Britney Spears slot game in the Arc Double is approved, and now we’re starting to see others in submission at GLI and about to be approved. And the market can’t wait to get them,” he said.

The game itself can be seen across a casino floor, he said. “You can’t go on the floor and not notice that it’s something new,” he said.

The Britney game will be followed up this month with Buffalo Grand, the latest version of the Buffalo game, and next in line will be Game of Thrones, due at the end of the month. “We’re coming with some really awesome hardware and three great titles to launch the software so we’re expecting very big things in the September quarter,” Wilson said, noting both Behemoth and Arc Double are drawing plenty of interest from casino operators.

One of the gaming products likely to turn heads at G2E is Lightning Link, one of the games in Aristocrat’s J* Series, featuring standalone progressive jackpot games. Lightning Link is the first such game Aristocrat is releasing in North America, Wilson said.

“This is a huge emerging trend and it was a big trend in the Australian market about three years ago when the market really shifted toward these progressive jackpots at a very rapid rate,” Wilson said. “We’re seeing the same trend play out in the U.S. market.”

One of the keys to the game is its ability to effectively merchandize and attract play. “You’re taking some of the big pays out of the pay table and you’re displaying them in a progressive jackpot so players can see where the money’s at,” he said. “These certain jackpots will get high and players will start playing them.”

The games, designed by Scott Olive, who also created the highly popular Hyperlink and Cash Express, continue to be top performers in Australia. “This has really been a driving force in the Australian market,” Wilson said.

Part of the success of the games is its multidenominational format, Wilson said, noting only about a third of Australian games coming through are in the 1- to 5-cent denominations. “So that tells us players want to bet up in denomination,” he said, “but we’re just not providing the right experience for them, so the game has been structured in a way that shows a player that there’s actually an incentive to bet the high denominations.”

Ultimately, it’s great content that wins the day, Wilson said, noting that casino operators continue to take a hard look at what they really need to spend on games, particularly recurring-revenue games. “This industry at the end of the day is very Darwinian. The best products survive, and players are the ultimate decision makers,” he said. “Players don’t play mergers and acquisitions. They don’t play bundles. Players play games. Our vision is to create the best products in every category that we operate in and the best products will win.”