Zynga: Acquisitions-Based Strategy for the Win

The company is having a strong run with two successfully acquisitions of Turkish gaming studios in 2020

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Ishan Majumdar
Aug 28, 2020
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After a particularly rough patch following its 2011 IPO, Zynga Inc (

ZNGA, Financial) has managed to stabilize as a company and become a leading player in mobile gaming with a management strategy based on a combination of solid in-house game development and pertinent strategic acquisitions.

The past few months have been mixed for the company. While the lockdown caused by the Covid-19 pandemic resulted in increased game time and significant growth in in-app purchases, it also resulted in advertisers slashing budgets, which affected ad revenues. Also, Apple's new policy to curb access to users' unique Identifier for Advertisers (IDFA) could have a long-term impact in terms of the company's revenues.

However, the management has dealt with the situation very well, in my view, and has carried out key gaming studio acquisitions over the past few months such as Peak and Rollic.

Company overview

Zynga is a U.S.-based company that is a global leader in interactive gaming on mobile platforms. The company is known to develop and market many games on both the iOS and Android operating systems, as well as social networking sites such as Facebook (FB) and Snapchat.

Founded in 2007, Zynga has its headquarters in San Francisco, California with offices in Canada, U.K., Ireland, India, Turkey, and Finland. It employs close to 1,981 people and its games are played in around 150 countries all over the world.

The company's core revenue streams are through in-app purchases of virtual goods, advertising revenues and paid game downloads. The company has a vast gaming portfolio which includes games like Zynga Poker, Words With Friends, Empires & Allies, Farmville, Mafia Wars, CSR Racing, Toon Blast and Merge Magic.

Inorganic growth strategy

Zynga has made a series of acquisitions over the past few years as the management has pursued a strategy relying on a mix of inorganic growth and strong in-house game development to keep the company growing in a rapidly evolving gaming industry. Some of the key acquisitions by Zynga in the past few years include names like Small Giant Games for $560 million, Gram Games for $250 million and NaturalMotion for $527 million.

The management has slowly gained confidence from these smaller acquisitions and has gone on to do the biggest deal in Zynga's history by acquiring Istanbul-based game developer Peak for $1.8 billion earlier this year. The company financed this massive acquisition through $900 million in cash and $900 million in stock. It is worth mentioning that Zynga had already bought Peak's casual card game studio in 2017 for $100 million.

With Peak coming in, the company has added Toy Blast and Toon Blast to its portfolio of games and an additional 12 million daily active users, increasing its base by more than 60% while helping Zynga expand its international reach.

After acquiring Peak, the company moved on to its next Turkish acquisition when it acquired Istanbul-based Rollic, a fast-growing hyper-casual mobile game company, paying $168 million for 80% of the company. Rollic's games have more than 250 million downloads and its acquisition has resulted in Zynga's entry into the hyper-casual gaming category. Rollic will add another 5 million mobile daily active users and 65 million monthly active users.

Despite a base of only 100 employees, this high level of daily active users is truly phenomenal, and Rollic's games could generate excellent ad revenues for the company. Zynga is being a bit cautious in its approach to acquire Rollic and intends to acquire the remaining balance of 20% in the company in installments at valuations based on specific profitability goals for Rollic.

Financial results

Zynga recently delivered a fantastic quarterly result with record bookings. The key acquisition of Peak games boosted its top-line and its daily active users. The company reported bookings of $518 million, above the management guidance of $500 million provided in early May 2020. The revenues also managed to beat the analyst consensus estimates of $504.59 million by a significant margin and were driven by significant growth in mobile revenues.

Mobile revenue and bookings accounted for 96% of the total top-line of the company. The management continues to be optimistic regarding third-quarter bookings and has provided guidance of $620 million resulting from the addition of Toon Blast and Toy Blast after the Peak acquisitions whereas the analyst consensus estimate is also close at around $615.72 million.

The company also reported a rise in profitability, with its earnings per share (EPS) at 10 cents, which was above the analyst consensus estimate of 8 cents.

The disappointment came in the form of the performance of the advertising revenues, as mentioned above. Apple's new policy is bound to hit the advertising revenues of all app-based advertisers on the iOS store.

Final thoughts

As we can see in the above chart, Zynga's stock has had a strong run over the past six months and has appreciated by as much as 29%. One of the biggest factors that is helping the company survive and grow well despite competition from the likes of Activision Blizzard (

ATVI, Financial) and Electronic Arts (EA, Financial) is its constantly growing portfolio of games.

Zynga already has Farmville 3, Harry Potter: Puzzles & Spells and Puzzle Combat in the soft launch phase and is integrating and expanding popular brands within its live services such as Fast & Furious in CSR2 and Rick and Morty in Merge Dragons. The acquisitions of Peak and Rollic have also added some big names to its portfolio. The management expects to start releasing new games in the latter half of 2020 which are all expected to scale with time and add to its daily active users.

Given these promising new launches and additions to its portfolio through acquisitions, I think Zynga is well on track for continuing active user growth in the future.

Disclosure: No positions.

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I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies. I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.