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FanDuel merger: A deal to rejoice or regret?

Terry smiling headShould we rejoice at FanDuel’s merger with a US games company rival or regret that it has become another Scottish company to lose its independence?

A tie-up with Boston-based DraftKings was confirmed on Friday, ending months of speculation, and prompting new questions about what happens next and what impact such a deal will have on Edinburgh’s status as a technology centre.

Does it signal yet another surrender by a Scottish company when the money men arrive waving big cheques at them? Or is this the start of something even bigger?

It may be hard for some to swallow, but FanDuel hailed as one of only two Scottish ‘unicorns’ – companies valued at $1 billion – wasn’t really Scottish anyway.

FanDuel employs 150 skilled designers and engineers in Edinburgh and Glasgow, but a company spokeswoman confirmed to me yesterday that its head office has been in New York since 2011, just two years after it was established.

She said it pays its taxes “wherever we operate” and as most of its business is in the US that must mean the US tax authorities benefit from the bulk of its dues.

I’m told that it will be “business as usual” following the merger with Boston-based DraftKings and there is no indication that the big-money move of its Edinburgh staff to newly-built neighbouring offices in the Quartermile development will be affected.

However, the deal will mean changes in the way the yet to be named newly combined company arranges finances and strategy. But there are likely to be organisational and structural efficiencies.

Both companies have grown exponentially in a short time, with FanDuel mopping up other tech firms including Kotikan, Scotland’s biggest developer of mobile apps.

But this growth has come at a cost. They have spent millions promoting games which have helped them command more than 80% of the US fantasy sports market.

Nigel Eccles: (photo by Terry Murden)

Nigel Eccles: (photo by Terry Murden)

Nigel Eccles, co-founder and chief executive of FanDuel, told a packed seminar in Edinburgh in September last year that the company was spending $200 million a year on advertising and had become one of the top five advertisers on US television.

In the process it has yet to declare a profit and since that gathering at Dynamic Earth, hosted by the games veteran Chris van der Kuyl, television spending has been slashed.

The merger, as the companies said in Friday’s joint statement, will help “accelerate the path to profitability”.

But it has also been driven by what they didn’t say: the messy legal issues that have cost both companies millions in lost business and settlement fees with various state authorities. Only last month they each agreed to pay $6m to settle claims of false advertising.

The legal row kicked off last year when the US congressman Frank Pallone called for fantasy sports games to be declared illegal as they breached strict US laws prohibiting online gambling. The companies claimed they were not involved in gambling and that, in any case, there was a loophole that allowed them to operate.

New York state attorney Eric Schneiderman subsequently filed a “cease and desist” order on the pair and their compliance saw them lose business in the sector’s biggest market.

After months battling to have banning orders overturned in other states, the two biggest operators in the market have succumbed to a deal which will cut their losses.

Friday’s statement gave us the usual upbeat message about the benefits of the deal, including a “greater focus on developing new products and features, loyalty programs, and enhanced social functionality”.

But this deal is as much about ensuring they prosper in a business in which customers and companies are playing for big stakes.

It has been claimed that neither DraftKings nor FanDuel are now worth their $1 billion valuations and Daily Business reported recently how they had asked the New York authorities if they could pay their fines in instalments.

Changes were evident when Mr Eccles’ wife and co-founder Lesley, decided she would be moving to the US and stepping down as executive vice-president of marketing. A regular on the Scottish speaking circuit, she is no longer working full-time with the company.

Deciding who was going to be CEO was said to be a sticking point in the merger with DraftKings and Mr Eccles has lost that battle to his counterpart Jason Robins. The Northern Irishman becomes chairman.

The merger is due to complete early next year, but it offers no guarantees for the future. Their combined command over the sector means the deal will attract the attention of the US competition authorities and some commentators believe that will be just as tricky to negotiate as the many legal contests they have faced.

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