California Video Game Company Files for Chapter 11

In a sign of increasing consolidation in the video game market, Agoura Hills, California game publisher THQ has filed for Chapter 11 bankruptcy. THQ is known for publishing games licensed by World Wrestling Entertainment, as well as its “Saints Row” series. The company’s president recently stated that in the current market, only a top handful of games are competing for consumer dollars. About a month ago, THQ’s chief financial officer resigned, and the company let it be known that it was looking for financing.

Chapter 11 of the Bankruptcy Code gives a struggling business a chance to continue as a going concern, while obtaining relief from some debt. Under a Chapter 11 business bankruptcy, some of the business’ debts are canceled. Typically, the company is then either sold, with the sale proceeds going to the creditors, or ownership is given to the creditors whose debts were written off. The idea behind Chapter 11 is that even a struggling business may be more valuable to its creditors as a going concern than as simply a collection of assets to be liquidated.

In THQ’s case, its assets are to be purchased by a private equity firm for approximately $60 million. The sale to the private equity firm may be what is known as a “stalking horse” bid – an initial bid made by a bidder working with the bankrupt company to establish a “floor” for acceptable bids in a subsequent auction. Typically, the stalking horse bidder does not expect to actually buy the bankrupt company, but simply places the first bid in order to prevent subsequent “low ball” bids.

An industry observer has stated that THQ has some games in the works that have the potential to do well in the marketplace. The Chapter 11 reorganization may allow creditors to recover some benefit from sales of those games.

Source: Los Angeles Business Journal, “THQ Files for Chapter 11, Plans To Be Acquired,” Natalie Jarvey, Dec. 19, 2012