Take-Two sets sights on lucrative mobile gaming market with record deal

Take-Two Interactive Software Inc. is looking to catapult itself to a top 10 mobile gaming developer with a record-setting offer for FarmVille-maker Zynga Inc.

Gaming analysts say the proposed cash-and-stock deal is less about Zynga's best-known mobile properties and more about its recent acquisitions. The deal announcement follows years of disappointing attempts by Take-Two to grow its mobile business organically.

"Take-Two moved very slowly in the mobile space, acquiring small studios late in the game and betting that it could organically grow its new mobile division," said George Jijiashvili, principal analyst at market research firm Omdia. "Seeing its close rivals rapidly expanding into mobile encouraged the company to make a bold move."

The proposed $12.70 billion transaction would be the most expensive acquisition ever in the gaming industry, beating Chinese media conglomerate Tencent Holdings Ltd.'s acquisition of Finnish gaming studio Supercell in 2016 for $8.60 billion. Zynga has 45 days to entertain alternative proposals. If no superior offers emerge, the Take-Two bid is expected to close during the quarter ending June 30.

Mobile's growth opportunities

Mobile made up 62% of global video game content revenue in the third quarter of 2021 and is outpacing growth from the PC and console segments, according to Kagan, a media research group within S&P Global Market Intelligence. The mobile segment accounted for about 60% of all global video game content revenue in the third quarter of 2020.

The growth is prompting major publishers around the globe, including Electronic Arts Inc. and Activision Blizzard Inc. in the U.S., to aggressively buy up mobile gaming companies and studios to not just tap the revenue potential of existing titles but also expand their existing flagship titles to the smaller screens.

Take-Two has trailed behind its larger U.S.-based publisher peers in terms of mobile revenue. Activision acquired Candy Crush-maker King in 2016, which put it on course to become the fifth-largest mobile gaming company by revenue as of the third quarter of 2021, according to Kagan's estimates. Meanwhile, EA broke into the top 15 mobile ranks with its 2021 acquisitions of Playdemic and Glu Mobile.

A Take-Two and Zynga merger would push the combined company into the top 10 mobile gaming companies worldwide by revenue, based on a combined $667.9 million revenue in the third quarter of 2021, according to Kagan.

"The mobile market is flooded with content, so it's difficult to break through with anything new, even with a strong IP attached," said Kagan analyst Neil Barbour. "Take-Two has launched multiple successful mobile games on its own, and growth was coming, but this acquisition puts them on a level that was probably out of reach through organic growth."

The Zynga acquisition also makes sense for Take-Two as it would allow the company to take its own franchises and turn them into mobile games, much like Activision did with Call of Duty, said Michael Pachter, managing director of equity research at Wedbush Securities.

"At a high level, the combined company will have the opportunity to bring more of Take-Two's intellectual properties to mobile buttressed by the expertise of Zynga," Pachter said.

Both Take-Two and Zynga will also be able to cross-sell experiences among their large player bases, particularly at Zynga given its free-to-play focus, Pachter said. The analyst expects Take-Two to let Zynga's leadership run the mobile part of the combined business without interruption.

Big bucks on the line

The proposed cash-and-stock deal values Zynga at $12.70 billion or $9.86 per share. That compares to a closing price of $6 per share or a market capitalization of $6.72 billion on Jan. 7, the last trading day before the deal announcement.

Zynga went public in December 2011 at $10 per share but has often traded lower in the years since. Market enthusiasm for the company briefly sent Zynga's market capitalization above $13 billion in February 2021, but it fell sharply in the second half of last year.

Take-Two's stock price fell 13% on the day of the announcement, indicating potential investor skittishness about the deal. Still, gaming analysts say the transaction represents a good value for Take-Two.

"I had a $12 price target on Zynga, so I think the price is a bargain for Take-Two," said Pachter. The analyst noted that Zynga has a deep portfolio of popular franchises, several studios with new games in development, and a market-leading advertising business, all of which Take-Two can tap to further expand its revenue opportunities.

The deal valuation is also in line with Baird's $10 price target, analyst Colin Sebastian wrote in a new research note.

"In our view, Take-Two is being opportunistic in acquiring Zynga given their recent valuation reset, which we have believed was overdone," Sebastian said. "We think this opportunistic deal makes sense given the benefits of scale and data in managing a portfolio of mobile games."

In the past 18 months, Zynga acquired six other companies, including Turkey-based Peak Games for $1.93 billion, Chinese studio StarLark for $513.1 million and San Francisco-based mobile advertising and monetization platform Chartboost for $250 million. The Peak Games deal, Zynga's largest to date, closed in 2020. StarLark, Zynga's third-largest transaction, closed in 2021.

"Beyond the obvious presence of cheap capital and continued consolidation across the industry, I think it's a shrewd decision by [Take-Two CEO Strauss] Zelnick to reposition Take-Two as a game publisher that can cater to the full breadth of the market," said Joost van Dreunen, a lecturer on the business of games at the New York University Stern School of Business.

From a business perspective, the marriage of the different portfolios also expands Take-Two's talent pool, especially considering Zynga's recent purchases, which are focused on more mainstream gaming markets, van Dreunen said.

While Zynga did inherit a wide range of popular titles from its acquisitions, the company itself is not known for producing blockbusters like FarmVille anymore, noted Serkan Toto, CEO of video game consulting firm Kantan Games.

"[Take-Two's] management waited for the right moment and the right price for too long," Toto said. "The company should have done this deal years ago when Zynga was available for a much lower price tag and when it was already clear it could not make it on mobile on its own."

In the light of the Zynga deal, Activision's $5.83 billion acquisition of King looks like a real bargain now, Toto said. However, he thinks Take-Two had no choice but to bite the bullet after the M&A frenzy the gaming industry has been seeing in recent years.

"What else was left that could move the needle for them on mobile, especially in North America?" Toto said.