By Justin Leung and Ryan Chan (Hong Kong University of Science and Technology), Knut Örnéus, Anna Muižniece and Jacob Andersson (Stockholm School of Economics)
Photo: Pandhuya Niking (Unsplash)
Overview of the deal
Acquirer: Take-Two Interactive Software, Inc.
Target: Zynga Inc.
Implied Equity Value: $12.7 billion
Total Transaction Size: $12.7 billion
Announced date: January 10th, 2022
Target advisor: Goldman Sachs & Co. LLC
Take-Two Interactive Software, Inc. (Nasdaq: WTOO) will acquire Zynga Inc. (Nasdaq: ZNGA) for $12.7 billion as per Take-Two’s announcement on January 10. Take-Two will acquire Zynga’s outstanding stocks for $9.86 per share, implying a 64% premium over the closing price on January 7. Upon closing, Take-Two will be paying $3.50 in cash and $6.36 worth of Take-Two’s stocks.
Take-Two estimates that the transaction will achieve significant revenue and cost synergies to the merged entity. Like many of the previous acquisitions that Take-Two has performed, Zynga is a market-leading specialist in the mobile game development and publishing sector, which Take-Two is highly interested in. By combining Take-Two’s diverse best-in-class portfolio of mobile games and Zynga’s mobile gaming expertise, the management anticipated a post-merger $500 million incremental net booking opportunity with the sharing of intellectual properties and a growth in “Recurrent Consumer Spending (RCS)” associated with a further diversified game offering. Plans for Take-Two to develop mobile games through having Zynga develop cross-platform products based on Take-Two’s well-known gaming characters and genre will be one of the best drivers to realize the opportunity. Furthermore, Take-Two expects $100 million in cost synergies within the first two years after closing.
“As we combine … we will deliver significant value to both sets of stockholders, including $100 million of annual cost synergies within the first two years post-closing and at least $500 million of annual Net Bookings opportunities over time.” - Strauss Zelnick, Take-Two CEO
Company Details (Acquirer - Take-Two Interactive Software, Inc.)
Take-Two Interactive Software, Inc. is a Nasdaq-listed holding company that develops and publishes interactive entertainment solutions globally under two of its major brands – Rockstar Games and 2K, alongside its private division. The company was founded in 1993 and headquartered in New York, NY. It has development studios located across the US, Europe, and Asia. Take-Two has gained market share with some of its notable console and PC games like the Grand Theft Auto Series (GTA), the Manhunt series, and the Mafia series. The firm also leverages acquisitions to expand its competency in the cut-throat mobile gaming sector, with the purchases of Socialpoint, Playdots, and Nordeus being some recent examples.
Founded in 1993, headquartered in New York, NY
CEO: Mr. Strauss H. Zelnick Esq.
Number of employees: 6,495
Market Cap: $18B (as of 30/01/2022)
LTM Revenue: $3.37B
LTM EBITDA: $847.37m
LTM EV/Revenue: 4.77x
LTM EV/EBITDA: 16.81x
Company Details (Target - Zynga)
Zynga Inc. is an American public company that develops social video games for desktops, tablets, and mobile phones. The firm was founded in 2007 and headquartered in San Francisco, California. Since its foundation, Zynga has seen rapid growth and is most known for its FarmVille series that flourished on Facebook in 2010. Currently, the firm has changed its focus towards mobile phones, hoping to capitalize on the smartphone's explosive growth. Zynga is today active in more than 175 countries and regions and has a broad portfolio of popular games downloaded over four billion times.
Founded in 2007, headquartered in San Francisco, California (USA)
CEO: Frank Gibeau
Number of employees: 2,245
Market Cap: $9.79bn (as of 28/01/2022)
LTM Revenue: $2.72bn
LTM EBITDA: $249m
LTM EV/Revenue: 3.65x
LTM EV/EBITDA: 39.92x
Projections and Assumptions
Burgeoning M&A activity in the gaming space hit a record high in 2021, and it seems this phenomenon is here to stay in 2022. We have witnessed two of the largest gaming acquisitions ever in the first month of 2022 - Take-Two’s $12.7B acquisition of Zynga, followed by Microsoft’s $68.7B acquisition of Activision Blizzard. By purchasing Zynga, Take-Two, which specializes in console and PC games like the iconic Grand Theft Auto, can capitalize on the explosive growth potential of mobile gaming, as console and PC gaming are facing declining growth. This deal is a critical step for Take-Two to consolidate its market positions in light of the fierce competition in the gaming industry, as it enables product diversification in a more publicly accessible market. Compared to Console games, Mobile games are easier to monetize over their lifetime and can reach a much larger audience of casual gamers, with smartphones becoming a daily necessity.
It's projected that the transaction will close in Q1 of 2023. The priority will be integration, where it Take-Two expects to figure out how to bring its blockbuster games to mobile and achieve cost-saving synergies for the new business.
The console gaming industry has cooled down during the last few years and even experienced a negative market growth last year. On the other hand, the mobile games segment has expanded rapidly and today constitutes more than half of the $180 billion game industry. The contrast in segment growth is because mobile games have a larger audience and better monetization capability since anyone with a mobile phone is a potential user.
The last years’ change in the game industry places significant demands on Take-Two and, the firm is hoping to tap into the continued growth of mobile gaming through the acquisition of Zynga. By entering the mobile game segment, Take-Two will diversify its business and likely obtain a leadership position in the mobile game segment. The merger will also increase the firms’ combined intellectual property portfolio and enable the firms to create long-term growth.
Through the merger, two highly complementary businesses will combine to create one of the largest public interactive entertainment companies in the world. The combined firm will get an improved financial profile and operate at a larger scale, leading to $100 million of annual cost synergies within the first two years and over $500 million of net yearly bookings possibilities over time.
Risks and Uncertainties
The pricing of the deal has been placed under question by financial analysts. One fundamental risk is that the premium of 64% paid for the acquisition might be too large and not justify the synergies. In similar recent acquisitions, Take-Two’s competitors have paid substantially less in premiums, including Electronic Arts 36% premium for Glu Mobile and Microsoft’s 45% premium in its offer to Activision Blizzard. The pandemic and associated stay-at-home regulations provided a tailwind to the secular trends, which underpin sales growth in the mobile gaming industry. However, the progression back to the pre-pandemic situation might hinder this accelerated growth in the future, and demand for mobile gaming will likely diminish relative to current levels. As such, there are new hurdles in creating reliable assumptions and predictions about the potential synergies of this acquisition.
Another risk is that Zynga and Take-Two's shareholders have yet to approve the merger. During this time, Zynga has 45 days starting from the announcement date to solicit potentially better offers from other companies. While it is unlikely Zynga will find a prospective buyer willing to top Take-Two’s offering, competitors such as Activision Blizzard (before the acquisition by Microsoft was announced) met with advisory firms to discuss overbidding Take-Two’s $12.7 billion offer.
Another potential hurdle to consider is the very different approaches both companies have to game development, and that consolidation of this ilk often leads to layoffs. While both are public companies, Take-Two is often more wait-and-see when it comes to innovation, part of the reason behind its less-developed mobile games business. On the other hand, Zynga can be considered more on the front foot with innovation. It will be challenging for the consolidated company to make the two different cultures work together.
“Without regard to any revenue synergies we expect the combined company to grow its top line about 14% annually for the next three years. We’re building this company for the long term, and that’s always been our approach.” - Strauss Zelnick, Take-Two CEO