China’s Tencent acquires majority stake in online game firm Riot Games for nearly $400M

Tencent, China’s most valuable internet company, has acquired a majority stake in U.S. online games firm Riot Games for nearly $400 million.

The deal is another validation of the social game business, which is one of the hottest sectors for user growth and acquisitions. And it shows that big international players such as the Chinese internet giant are moving in on the fast-growing market for social games in the U.S.

Los Angeles-based Riot Games is one of the industry’s venture-backed success stories. The company unveiled its hit game, League of Legends, in October 2008. The online game combined quick-hit fighting sessions in a fantasy action setting. It was like the video game equivalent of a pick-up basketball game. The game was inspired by the free “mod,” or user-generated modification, Defense of the Ancients, a popular version of WarCraft III. Riot Games said the company has more than 1 million active players. They log in more than 500 million minutes each month.

“We shared a philosophy and built a mutual respect with Tencent,” said Brandon Beck, CEO of Riot Games, in an interview. “It is an interesting time for games. Social and mobile games are very interesting, but it’s not our focus. We are very focused on core game experiences, which are also evolving from a packaged good to an online service.”

Beck said the company would tap Tencent’s resources for a worldwide expansion. Bloomberg reported the rumored deal first, and we’ve confirmed it in an interview. The companies did not confirm the purchase price, but Bloomberg reported the deal was valued at $350 million, based on a knowledgeable source. We hear it’s closer to $400 million and that there isn’t a huge earn-out in the number. (An earn-out is an extra payment if the acquired company meets performance targets in the future).

Shenzhen-based Tencent, which has more than 600 million users for its QQ messaging service in China, is already a part owner of Riot Games. Other Riot Games investors include Benchmark Capital and FirstMark Capital. Tencent also owns 10 percent of Russian investment firm DST, which owns stakes in Facebook and Zynga.

The deal by Tencent is the biggest cross-border incursion made by a Chinese company in the games business. Early last year, China’s Shanda Games bought Mochi Media, a Flash game platform company in San Francisco, for $80 million. Other big deals in social and mobile games include Disney’s purchase of Playdom for up to $763 million and DeNA’s purchase of Ngmoco for $403 million.

Riot Games was founded five years ago by Beck and Marc Merrill, who saw potential in an idea dubbed “session-based” gaming, or short games you could play during a lunch break. Their game is a downloadable title that is free-to-play, where users pay real money for virtual goods such as character strengtheners. The deal is expected to close within 30 days. During its history, Riot Games raised $18 million in two venture rounds and one angel round. It has more than 150 employees and has 100 open jobs now. Not bad for a company that has only one published game.

Mitch Lasky, a partner at Benchmark and a member of Riot’s board, said that Riot Games built a “disruptive” position in the game market. Beck said the deal was structured in a way that will allow Riot Games to operate independently, and David Wallerstein, senior executive vice president at Tencent, said that Riot will have support and autonomy. Lasky said the combination of the loyal fan base and great monetization through virtual goods made Riot Games so valuable, although he declined to say what the actual value was.

League of Legends is available in Europe and the U.S., but it will expand to other regions this year. Tencent is publishing the game in China. Beck said the game has a passionate fan base that plays for an enormous amount of time. The company updates the game at least once every two weeks with new content, bug fixes, and changes to suit gamers. As for the future, Beck said, “We really feel like we’re just getting started.”