Take-Two has announced plans to acquire listed mobile games publisher Zynga in a deal worth $12.7 billion. The offer represents a 64% premium on Zynga’s closing share price on January 7^th, 2022. The terms of the agreement means that Zynga can listen to alternative offers from other parties up until February 22^nd, 2022.

How Zynga could change Take-Two’s business

Zynga offers Take-Two a $2.7 billion turnkey mobile business, which would substantially elevate its ongoing expansion within the fastest growing part of the games sector. It would transform Take-Two’s mobile games business into one of the biggest globally and make it much more comparable with its long-time competitors, EA and Activision Blizzard.

Zynga has MAUs of 183m, while King had Q3 2021 MAUs of 245m. A Zynga acquisition would allow Take-Two to leapfrog EA’s mobile games revenue and bring it on a par with Activision Blizzard’s. In terms of business transformation, a Zynga deal for Take-Two would probably be most comparable to Activision Blizzard’s acquisition of King back in 2016 and would establish a more robust long-term growth story for investors.

The acquisition would allow Take-Two to radically diversify its audience and expand its global reach into more social and mobile-focused markets. It would give the company stronger capabilities in running live-service titles in the mobile space, and Zynga’s studios in turn would benefit from getting access to Take-Two’s extensive IP portfolio. Zynga brings advantages in terms of mobile user acquisition through its Chartboost business and the additional network scale the combined entities deliver would help in terms of UA and monetisation in a post-IFDA world.  

There are also some interesting potential synergies between Zynga’s sports titles – particularly Golf Rivals - and Take-Two’s drive to build out its sports genre pipeline. Overall, Take-Two and Zynga look like a good fit on paper.

Why are established games publishers getting more active in M&A?

Traditional games publishers have become increasingly active in terms of studio and games company acquisitions as competition for talent and IP has increased. Not only is there continued high games industry demand due to the proliferation of companies, storefronts, and services active in the market but there is also increasing demand from adjacent sectors, such as film and TV, that have a growing need for games dev skills.

The high valuations of games companies through the pandemic has helped fuel investments and acquisitions: higher valuations mean studios are more likely to listen to offers and existing big games companies have more leverage to make acquisitions.

$12.7bn seems a lot, but is it?

Take-Two has been pretty active in terms of acquisitions during the last 18 months but missed out on a deal to buy Codemasters to EA at the beginning of 2021. However, Acquiring Zynga for a total enterprise value of $12.7bn is a major step up from the $1.2bn EA paid for Codemasters and represents a much more transformative purchase for the company.

The 64% premium on Zynga’s share price seems like a lot, but with the option for Zynga to consider other potential offers before the deal closes, Take-Two will have been wanting to put its strongest foot forward to secure the deal. At that level it is much less likely for another publisher or entity to step in to compete. The value Zynga represents to Take-Two is higher than to many other publishers that already have strong mobile games businesses.  

Big acquisitions always have challenges

There are a few challenges a combined entity faces and the extent of their impact on the business mostly comes down to the leadership and business execution. One is cultural. While they are both 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) whereas Zynga can be considered more on the front foot. A key question is whether these cultures can be successfully blended and made efficient enough to realise the touted synergies on offer.

Additionally, both companies have made several acquisitions during the last 18 months. Combining all these newly mixed entities will be an ongoing challenge, which might disrupt efficiency and execution on product strategies to an extent. In its investor presentation, Take-Two also outlined annual cost synergies of $100m within two years of a deal for Zynga closing. That will likely involve shifting around resource and combining of offices. Executing on these sorts of targets can be especially hard to navigate without undermining and damaging company moral.