Undead Labs Becomes Independent as Splash Damage Deal Collapses

Undead Labs, developer of State of Decay, has become an independent, employee-owned studio following the collapse of a planned acquisition by Splash Damage. The studio, which Xbox bought in 2018, is no longer under Microsoft’s control and is continuing development on State of Decay 3. The game’s publisher has not yet been announced. This outcome was not the original plan: UK developer Splash Damage, known for Gears Tactics, Brink, and Enemy Territory, was actively acquiring Undead Labs with funding from private equity firm Emona Capital when the deal fell through.

The Failed Acquisition

Splash Damage and Emona Capital Back Out

Splash Damage was in the process of acquiring Undead Labs with financial backing from Emona Capital, the same private equity firm that funds Secret Mode, publisher of the upcoming Star Wars: Galactic Racer. According to The Game Business, the two parties were actively working through the acquisition when negotiations unexpectedly collapsed. The specific reasons for the deal’s failure remain undisclosed, with neither Splash Damage nor Undead Labs offering public explanation. Kotaku independently verified the acquisition details through sources with direct knowledge of the situation, confirming that negotiations had been genuine rather than speculative.

Independence Instead of Acquisition

After the Splash Damage deal dissolved, Undead Labs leadership and staff moved quickly to secure ownership of the studio themselves, establishing it as an employee-owned operation. However, this path to independence has come with significant costs. Recent layoffs have affected the studio as it separates from Microsoft’s financial backing and restructures to operate independently. This mirrors the experience of Double Fine, another formerly Microsoft-owned studio that recently regained independence and also conducted layoffs during its transition away from corporate ownership.

State of Decay 3’s Future Remains Unclear

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State of Decay 3 continues in active development at Undead Labs, though the studio has not announced a publisher. This remains one of the most significant open questions surrounding the game. Without Xbox’s backing or a confirmed publishing partner, Undead Labs must find external support to ensure the game reaches market successfully. The publisher decision will likely influence the game’s marketing strategy, platform distribution, and release timeline.

Part of Xbox’s Larger Restructuring Wave

Asha Sharma Oversees Major Changes

Undead Labs’ transition unfolds within Xbox’s broader corporate restructuring under newly appointed leadership Asha Sharma. The company has already conducted multiple rounds of layoffs and studio closures throughout 2026, with an initial wave in July followed by ongoing organizational shifts. Company leadership has publicly stated that additional workforce reductions and restructuring will occur before the end of the year. This series of changes has produced vastly different outcomes across affected studios, ranging from newfound independence to impending closure.

Ninja Theory’s Darker Outlook

Ninja Theory, another formerly Xbox-owned studio, offers a stark contrast to Undead Labs’ situation. Like Undead Labs, Ninja Theory faced a failed acquisition attempt after separating from Xbox ownership. Unlike Undead Labs, which achieved independence, Ninja Theory is reportedly preparing for possible studio closure before the end of 2026. The divergence between outcomes illustrates how precarious the landscape has become for studios no longer supported by major platform holders. Independence, while clearly preferable to closure, still demands significant operational restructuring and staff reductions to achieve financial viability.

The Reality of Independence

The layoffs affecting Undead Labs point to a fundamental challenge of studio independence: operating budgets must immediately contract when major corporate funding disappears. A newly independent studio must reduce headcount to align spending with its new financial capacity. For Undead Labs, this means completing State of Decay 3 with fewer resources and staff than it possessed under Xbox ownership. The studio must simultaneously navigate development constraints while seeking a publishing partner to successfully bring the game to market.

Private Equity’s Growing Influence

Emona Capital’s involvement in the failed Splash Damage acquisition reflects private equity’s expanding role in game development and studio acquisition. The firm’s portfolio—funding Splash Damage’s attempt to acquire Undead Labs and backing Secret Mode as a game publisher—demonstrates how capital from outside traditional game publishing is reshaping studio ownership patterns. These financial dynamics typically remain hidden from players until deals either complete or collapse, as occurred with Undead Labs. The private equity funding behind Splash Damage underscores how studio acquisitions in the gaming industry increasingly depend on external financial backing rather than resources from traditional publishers.

An Uncertain Road Ahead

For State of Decay fans, the path to State of Decay 3’s launch now involves substantial uncertainty. The franchise enters its next chapter with a newly independent developer, reduced staff, no announced publisher, and an unconfirmed development timeline. Whether Undead Labs can successfully complete the game while managing staffing constraints, securing publishing support, and maintaining development momentum remains one of the year’s most significant open questions for the gaming industry.