State of Decay 3 Studio Undead Labs Narrowly Avoided Splash Damage Acquisition, Now Employee-Owned

Undead Labs, the studio behind State of Decay, came close to being acquired by Splash Damage before the deal collapsed, according to reporting by The Game Business, confirmed by Kotaku sources. Instead, the studio has left Microsoft and become fully employee-owned, and it is continuing work on State of Decay 3.

The deal that fell through

Splash Damage, the UK studio that co-developed Gears Tactics, was set to buy Undead Labs with funding from its private equity backer, Emona Capital. Emona also finances Secret Mode, the publisher of the upcoming Star Wars: Galactic Racer. The deal fell through for reasons that have not been disclosed.

Instead of passing to new owners, Undead Labs’ leadership and staff secured independence. On Tuesday, the team announced it is now fully employee-owned and no longer part of Microsoft. Xbox had acquired the studio in 2018.

What’s next for State of Decay 3

Undead Labs, founded in 2009 and based in the Seattle area, built the State of Decay series around open-world zombie survival with community building and permanent character loss. State of Decay 2 was released in 2018, and State of Decay 3 was announced in 2020 as an Xbox title.

The studio says development on State of Decay 3 is continuing. Studio head Philip Holt has confirmed the game remains in active development, though it currently has no confirmed publisher. The move to independence also came with layoffs, so the team working on the game is smaller than before. No release date or platform list has been announced under the new arrangement.

Part of Xbox’s wider upheaval

The Undead Labs situation is part of a broad restructuring at Xbox. Other studios have seen different outcomes. Double Fine is also independent again and saw layoffs during its transition. Ninja Theory, which also had sale deals fall through, is facing potential closure, with Microsoft in a consultation process.

Xbox’s latest layoffs and studio changes follow earlier cuts in July, with more changes expected under new leadership. Undead Labs’ route to independence reflects a wider trend of large publishers reassessing which studios and projects they want to keep.

Why it matters

For State of Decay fans, the main question is whether State of Decay 3 will still be released and where. The good news is that the game is still being made. The uncertainty is that it now needs a publisher, which could affect its timing, its platforms and whether it arrives on Game Pass as originally expected.

For the industry, an employee-owned studio with a known franchise is an unusual outcome, and how Undead Labs finances and publishes State of Decay 3 will be closely watched by other teams facing similar restructuring.