Daily Insight: Take-Two and Zynga
We’ve got some big acquisition news in the world of MyWallSt, with Take-Two Interactive announcing the proposed takeover of Zynga this week. The mobile games developer will cost a pretty penny, with the deal giving it an enterprise value of $9.86 a share, or $12.7 billion all in — a 64% mark-up on its valuation before the announcement. It will be paid for in a mixture of cash and shares, with Zynga shareholders receiving $3.50 in cash and $6.36 in Take-Two stock for each share they own. Take-Two has received $2.7 billion from JPMorgan to fund the transaction.
The motivation for the deal is pretty simple: Take-Two needs to get into mobile, and fast. In the fiscal year 2022, the company took in just 12% of total revenues from mobile. Considering the nature of its blockbuster franchises like ‘Red Dead Redemption’, ‘NBA 2K’, and ‘Grand Theft Auto’, this seems reasonable. A far cry from Zynga’s ‘Farmville’ and ‘Words With Friends’, they are expansive franchises that need the full capabilities of next-gen consoles and PCs to deliver their full value. We don’t need to delve into processing power and graphics cards to know that playing 2K is going to be a better experience on a PS5 than an iPhone.
However, when we take into account the tear that mobile gaming has been on and the hold it now has over the wider industry, even a company of Take-Two’s stature needs to get on board or it will get left behind.
Take-Two CEO and President Strauss Zelnick stated as much in his comments on the deal:
“We are thrilled to announce our transformative transaction with Zynga, which significantly diversifies our business and establishes our leadership position in mobile, the fastest growing segment of the interactive entertainment industry.”
Going from falling behind to a market leader in one fell swoop is a significant coup for the company, one that could justify the premium it paid. When we look at some mobile gaming figures, the picture becomes even clearer:
Mobile gaming was responsible for 59% of global gaming revenues in 2021.
IDG Consulting has the estimated market value at $136 billion in 2021 and expects it to compound at 8% for the next three years. More ambitious modeling from Research and Statistics has it at a CAGR of 23%.
Take-Two expects mobile gaming to comprise 50% of total revenues in the next fiscal year, up from 12% last year.
U.S. gamers spent an average of $179 a year on mobile gaming in 2020.
Global gamers are expected to surpass 1.3 billion by 2026.
This last point may be the most pertinent when it comes to the global reach of Take-Two. Management highlighted the opportunity for “geographic expansion into growth markets across Asia, including India, and the Middle East” as one of the key strategic benefits of the deal. Considering Asian gamers are predominantly mobile-first, Zynga’s expertise will be key to success in these regions.
It also provides the platform for the company to flex its considerable library of intellectual property. We mentioned the success of ‘GTA’, ‘Red Dead Redemption’, and the ‘2K’ franchises earlier, and while better suited to PC and console, that does not mean they could not find success on mobile. Zynga’s considerable expertise in the area could smooth out the process and provide a new audience to its known favorites. Although, a ‘Pokemon Go’ equivalent of GTA does sound a tad dangerous now that I dwell on it. But, the point is that the option is now there to meet the customer where they are, and while there may be a trade-off in quality on mobile, the strength of brand could be enough to make a significant impact on revenues in the future.
Management also highlights a series of less sexy, but just as important benefits, including $500 million of incremental annual net bookings opportunities to unlock over time, Zynga’s nearly 3,000 employees including its team of highly-talented mobile developers, and — perhaps most importantly for investors — more predictable, less volatile revenue streams as it becomes less reliant on the release schedules of big name games. All of this has led to an expected 14% CAGR for Take-Two until the fiscal year 2024.
So why was Take-Two stock down 14% on the news? This deal makes a lot of sense, right? Many may feel the 64% premium is a hefty price tag to pay for a business down almost 50% from its 52-week highs.
There is also the old chestnut that comes with any acquisition paid for in stock: dilution. The company will grant roughly $8 billion in newly issued stock to Zynga shareholders in the transaction. At its current valuation of $16 billion, that means your ownership allocation has been reduced by about a third. We can also expect further dilutive events as Zynga has two series of convertible notes due in 2024 and 2026. Of course, you will own a smaller slice of a larger pie, but perhaps this new flavor is not to your taste.
While we’ve discussed the advantages of the acquisition, the potential synergies, and the opportunities that will arise from it, Take-Two and Zynga are very different companies. One is a high-end PC and console developer with a stable of big-money names that garner a huge following, the other is a mobile developer with more basic games that are — for the most part — free to play. While not exactly chalk and cheese, the expansion into mobile might be perceived as a step too far for certain investors. There are also the ever-present integration risks that come with any big acquisition.
Lastly, we have the small issue of debt. The company is taking on $2.7 billion in financing for the acquisition. Not an insignificant number for a company whose combined market cap will come in at roughly $25 billion.
While more conservative investors may look at the latter arguments as deal-breakers, the long-term benefits scream potential. As always, acquisitions carry significant execution risks, but the rewards at stake could be transformative for Take-Two. This is one I’m looking forward to seeing play out in the years ahead.