Why Japan should sell Nintendo

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A few months into the pandemic, when large parts of a bored, hunkered-down world were thinking about buying Animal Crossing: New Horizons, an excitable, expansionist Microsoft was thinking about buying the games maker, Nintendo.

Nintendo? The unbuyable factory of whimsy? Asia’s mightiest exporter of soft power and Japan’s closely held Fort Knox of intellectual property? Madness. Well, perhaps. But madness of a type that might benefit Japan far more than it will admit. 

Japan should think about selling Nintendo as both intellectual experiment and shock therapy. Or at least admit why it definitely won’t. The more unthinkable such a sale might sound, and the more horrifying the prospect of relinquishing a crown jewel, the more valuable the whole thought process becomes for less flashy troves of corporate excellence.

Evidence of Microsoft’s interest in the endlessly fecund, Kyoto-based spawning ground of Super Mario, Zelda and Donkey Kong surfaced briefly last month when documents amassed as part of the US software giant’s legal fight with the Federal Trade Commission over the proposed $75bn purchase of Activision Blizzard leaked online. 

Among the cache (later removed) were internal emails from 2020 between several senior Microsoft executives and Phil Spencer, chief executive of the company’s games division and field marshal of its console war with Sony. “Nintendo is THE prime asset for us”, wrote Spencer, who revealed that he had held numerous conversations with Nintendo’s leadership about working more closely with Microsoft. 

There was no obvious near-term catalyst that would trigger a sale process, he acknowledged, nor any good sense in going hostile as a buyer. Still, Spencer concluded, the deal would be a “career moment” and if any US company had a chance with Nintendo, it would be Microsoft. 

It is a bold claim given who else might be thinking exactly the same. Nintendo holds the world’s most valuable entertainment intellectual property (Pokemon and Mario) that are not owned by Disney (Mickey Mouse, Marvel, Star Wars). In an entertainment market that seeks ever greater depths of immersion, it is a consummate world-builder. Above all, it is Japanese — a reminder of the outsized national capacity to entertain on a global scale.

Whether you are in games, consumer tech or the wider entertainment business, Nintendo belongs at the top of your acquisition wishlist. All the more so now that The Super Mario Bros Movie has taken $1.36bn at the global box office and Zelda: Tears of the Kingdom sold 18.5mn copies in its first two months to users of the seven-year old Switch console.

At the same time, Nintendo lives in a stock market that has run an enthusiasm deficit for most of the past 30 years. IP-laden, and massively profitable Nintendo’s market capitalisation is, in dollar terms, $55bn, or roughly $20bn less than Microsoft wants to pay for Activision. Japanese companies are not generally priced as if they are ever likely to become acquisition targets, either by domestic or foreign buyers. Nintendo, whose stock is held at scale by both the founding family and loyal investors, is a symbol of this.

There are two reasons why, however hard it is to imagine the pathway to that event, a sale process of Nintendo would be transformative — not least because it might convince consolidation-resistant Japanese companies to seek scale and protection through mergers. 

The first is that for Japan as a whole, the intensely high profile of a Nintendo sale would finally crystallise the sense of how undervalued many of its crown jewels really are — and how many smaller jewels are being sold to private equity and others at bargain prices. Microsoft would merely be one of many potential buyers: it is easy to imagine Disney or Apple stepping in, followed quickly by Google and Sony. Activision’s deal valuation would look small by comparison.

But the greater reason is that Japan may itself need the sort of moment that it foisted on the US in 1989 when Sony bought Columbia Pictures. That acquisition, in all its boldness and ferocity of ambition, was disruptive in a way that was ultimately as valuable to a then-chagrined Hollywood as it was to Japan’s sense of achievement.

Disruption is not something that an individual company or a market tends to wish upon itself, but there is a risk that Japan’s stock market has painted itself into a corner where only disruption will do. Until this actually comes, the country could do worse than think about how positive a disruptive Nintendo sale might be.

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