By Wallace Witkowski
Zynga Inc. is selling for less than $10 a share, more than a decade after going public at that price and embarking on an acquisition parade.
Take-Two Interactive Inc. /zigman2/quotes/204008930/composite TTWO -0.03% announced Monday it plans to buy Zynga in a cash and stock deal worth $12.7 billion , sending Zynga’s stock price to an intraday high of $8.91, or 49% higher than Friday’s close. The proposed cash-and-stock deal would value Zynga shares at $9.86 — tantalizingly close but just short of the magic number for the mobile-games company.
On Monday, Zynga shares closed at $8.44 for a 40.7% gain, while Take-Two shares finished down 13.1% at $142.99, their worst drop since Feb. 6, 2019, when they dropped 13.8% following a particularly disappointing outlook .
Zynga went public in December 2011 at $10 a share, and spent a few months after the initial public offering trading higher than that price. But Zynga shares were pummeled in 2012, as gamers departed Facebook /zigman2/quotes/205064656/composite FB +3.73% , where “Farmville,” “Zynga Poker” and other early Zynga games found their fans, and moved to mobile.
Zynga purchased OMGPop in 2012 for the mobile game “Draw Something,” and the company went on to spend billions on similar acquisitions over the next decade, while the share price stayed lower than $10. By the end of 2020, Zynga had spent more than $2 billion in actual cash on acquisitions since going public, according to FactSet Research. That total does not fully reflect the value of the deals announced but just the net cash spent on other companies.
In the past 18 months alone, Zynga has acquired six companies for announced prices of more than $3 billion — Peak Games in July 2020 for $1.9 billion , Rollic Games in October 2020 for $180 million , Echtra Games in March for an undisclosed price , Chartboost in August for $250 million , StarLark for $525 million in October , and ByteTyper in November for an undisclosed price. Over the company’s history, Zynga has made 40 acquisitions in total, according to Crunchbase.
See also: This half-billion dollar Zynga acquisition just paid off
The bulk of those acquisitions have been doing the heavy lifting at Zynga, according to Dennis Yeh, senior insights analyst at app analytics data firm SensorTower.
“It is worth noting that most of Zynga’s current top games are from recently acquired studios,” Yeh said. “Though Zynga rose to prominence on the success of its in-house titles … over the last few years the mobile game publishing giant has developed a reputation as an acquirer of quick growing mobile franchises.”
Yeh noted that the top-performing Zynga game from a player-spending perspective in 2021 was “Toon Blast,” which was acquired in the Peak Games deal and did $415 million in business from player spending. “Empires & Puzzles,” from Small Giant, was close to that total with $378 million in player spending last year, according to SensorTower data.
“After strategic purchases of Gram Games, Small Giant, and Peak Games, acquired titles make up approximately 65% of their 2021 in-game bookings (not including new games launched by the studios since acquisition),” Yeh said.
After years of struggling stock prices, Zynga seemed to turn things around with a push into bigger and more noteworthy videogame worlds , and shares finally topped $10 again for the first time since early 2012 in 2020, and maintained that level in 2021. However, from June 1, 2020 — when Zynga first announced the Peak deal — until Friday’s close, Zynga shares had fallen 34%, or 40% below the company’s 2011 IPO price of $10 a share.
Investors, however, didn’t seem to think Take-Two got much of a deal with its purchase of Zynga at lower than the IPO price.
“Take-Two Interactive did commit to paying a meaningful premium on the previous closing share price of Zynga,” NPD Group analyst Mat Piscatella told MarketWatch in emailed comments. “So, it’s not so much a question of whether opportunity exists here (I think it clearly does), but rather the timing and cost.”
Piscatella did say that “strategically, it makes sense” for Take-Two to acquire Zynga, adding mobile assets that competitors such as Activision Blizzard Inc. /zigman2/quotes/200717283/composite ATVI +0.07% , which bought “Candy Crush” maker King Digital in 2015 , have already acquired.
“Mobile is the biggest, and fastest-growing, video game content market. And some of the biggest properties on mobile now include IP with console/PC roots like [Epic Games’] ‘Fortnite,’ [Microsoft Corp.’s /zigman2/quotes/207732364/composite MSFT +1.43% ]’Minecraft’ and [Activision’s] ‘Call of Duty,'” Piscatella said. “Zynga also has experience and capabilities in several areas that are opportunities for Take-Two Interactive.”
“The videogame market is moving more towards properties that allow consumers to engage with them wherever they may wish to play, whether it’s on console, PC, mobile or wherever gaming may go next,” he said. “And the more scale a game has, the more gravity it is likely to have both in attracting new players, and in encouraging existing players to play more.
“From that perspective, an expansion of capabilities such as those Zynga provides is likely a positive,” Piscatella said.
Zynga’s add to Take-Two might be so sweet that Jefferies analyst Andrew Uerkwitz even ventured the possibility a competitor may try to spark a bidding war.
“The acquisition significantly increases TakeTwo’s exposure to mobile (currently ~10% of revenue),” Uerkwitz said in a note. “More important, there is a change in mgmt tone toward focusing on mobile for its core franchises by leveraging the Zynga’s expertise.”
“We believe there is tremendous value in Zynga and wouldn’t be surprised if there are over-the-top bids,” Uerkwitz said. The Jefferies analyst has buy ratings on both Zynga and Take-Two.