Take-Two-Zynga is a very big deal, but is it a good one? | This Week in Business

This Week in Business is our weekly recap column, a collection of stats and quotes from recent stories presented with a dash of opinion (sometimes more than a dash) and intended to shed light on various trends. Check back every Friday for a new entry.

The big news this week was Take-Two's agreement to acquire Zynga for roughly $12.7 billion in cash and stock. It's a big, splashy deal, and the largest gaming acquisition deal of the pandemic, handily topping Microsoft's blockbuster $7.5 billion payout for Bethesda in September of 2020.

To put it simply, it's a very big deal.

It's also a little surprising, given what we heard from Take-Two in the past after it gave up on its attempt to buy Codemasters almost exactly a year ago, after its nearly $1 billion bid for Codemasters was topped by Electronic Arts' $1.2 billion deal.

QUOTE | "Prices are pretty heady, and we are remaining disciplined. We are anxious to grow. Our entire story really has been organic growth. We have the balance sheet to grow inorganically as well, but we've shown with Codemasters -- a deal we very much wanted -- that under all circumstances, we'll keep a firm grasp on our HP12C [financial calculator] on the one hand, and our discipline and strategy on the other." - In February of last year, CEO Strauss Zelnick told us consolidation is driving prices up across the board, which could discourage Take-Two from joining in on the M&A frenzy.

That was basically the same sort of pragmatic approach we've always heard from Zelnick. In the past, he's often preached prudence over aggression. Take-Two has always wanted to meet consumers wherever they happen to be, rather than making big bets to push consumers to more profitable models like digital distribution or set up camp wherever they expect consumers to arrive later on. Take-Two has tinkered in virtual reality, free-to-play games, and subscription services, but usually in an exploratory fashion, just something to establish a baseline understanding of that market in case the audience pivots there and the publisher is forced to follow.

But on the surface at least, the Zynga deal suggests Zelnick isn't clutching the ol' HP12C quite like he used to.

STAT | 11% - The premium Take-Two agreed to pay for Codemasters over the racing studio's share price.

STAT | 37% - Roughly the premium Electronic Arts eventually paid to acquire Codemasters in a deal that Zelnick implied would have been undisciplined to match or top.

STAT | 64% - The premium Take-Two is paying over Zynga's closing share price from last Friday.

These aren't apples-to-apples comparisons here, obviously. What Codemasters offers Take-Two is very different from what Zynga could bring to the publisher. Codemasters' stable of racing games would have filled a gap in the racing and sports genres for Take-Two, but the products would very much have been in the publisher's AAA comfort zone. And while Take-Two has been beefing up its mobile presence in recent years with acquisitions like Social Point, Playdots and Nordeus, a completed acquisition of Zynga pushes its mobile business into an entirely new category.

The premium might also be Zynga's share price has been dropping. That 64% premium is on a closing price of $6, so the roughly $9.84 a share Take-Two is paying looks like an overpay now, but perhaps less absurd when you consider Zynga shares were trading above $12 last February. And what's really changed for Zynga since then? It acquired some companies and posted net losses despite growing revenues, sure, but that's essentially been "The Zynga Story" for years. It's exactly what Zynga was doing when its stock hit that $12 high.

So maybe Take-Two figures Zynga's share price halving in a year is an overcorrection, more a function of industry-wide share price declines as the pandemic boost fades a bit and some investors brace for a "return to normal" that impacts gaming. (Or at least keeps it from having quite as much short-term upside as some other investments.)

That could be true, but the acquisition still looks like a more aggressive move from Take-Two than we're used to seeing, and Zynga doesn't seem like a perfect fit for Take-Two's corporate culture. Where Take-Two explores trends tentatively and pragmatically, Zynga hires a VP of blockchain gaming before it can even articulate a coherent strategy for the technology.

QUOTE | "We want to use our infrastructure, our intellectual property, and our assets that we have internally to make sure we have a speed advantage to go into NFT and blockchain gaming. That's the way we're thinking it through. We don't have anything concrete to announce." - Zynga president Bernard Kim talks blockchain with us last November, in an interview that made it very clear the company is pouring significant resources into the space despite not having answers to some fundamental questions about what blockchain will do and why it's needed.

There's also the companies' acquisition strategies up to this point. Zynga has acquired a ton of companies in recent years, and while they've provided the company with top-line growth, they've also undermined the bottom line, with performance-related payouts at times causing Zynga to post losses alongside booming revenues. Next month Zynga will report its Q4 results. If it hits its forecast, it will wind up with a $97 million net loss for 2021. 2020 saw a net loss of $429 million, the largest in company history. The year before that, Zynga posted $42 million in profits, but that's only because it sold its San Francisco headquarters for $600 million that year.

By contrast, Take-Two has been more selective about its acquisitions, and managed to make them without racking up losses like Zynga.

We had a chance to ask Zelnick earlier this week about the difference in strategies and cultures, and he employed some rhetorical acrobatics to suggest the different approach is actually a perfect fit for Take-Two.

QUOTE | "We have a relatively unusual structure in that we have labels that operate their own businesses, in a pretty decentralised way... That [Zynga] division will be led by [Zynga execs] Frank Gibeau and Bernard Kim. Their track record speaks for itself. So we have consistent cultures, we have a consistent strategy, we have a consistent approach, and Frank and Bernard and the team will run that business day-to-day. That's very much how we operate with Rockstar Games, 2K Games, and Private Division, so we think it's a great fit." - Zelnick explains that the plan is basically to let Zynga keep being Zynga.

I'm guessing now that Zynga will pump the brakes on its acquisitions spree, having made the big sale and operating within a larger organization that won't be so eager to absorb its losses in favor of revenue growth. Take-Two may also attempt to curb some of Zynga's spending habits. For example, in its last fiscal year Take-Two spent just 13% of its net revenue on sales and marketing efforts, and just over 9% in research and development. For its most recently reported quarter, Zynga's sales and marketing spend was 31% of its revenue, while research and development was 20%. What's more, both of those numbers were already down significantly from the respective 37% and 33% of total revenue it spent on those areas in the year-ago quarter.

But without being able to rely on adding games to its portfolio through acquisition, Zynga's growth will come down to its ability to keep existing hits vibrant, its ability to create new hits in-house, and blockchain.

It has done the first thing very well, with titles like Zynga Poker and Words With Friends reporting some of their best quarters in recent years and consistently cited as driving results.

As for Zynga's ability to create new hits in-house, some branded slots games aside, I would say that hasn't been a strength of Zynga's in recent years. Farmville 3 just launched in November and Star Wars: Hunters is just around the corner, so maybe that's about to change. Then again, Farmville 3's Google Play install stat of "1 million+" suggests it's going to be a slow burn at best, and judging by its Overwatch-esque gameplay trailer, Star Wars: Hunters is the least Star Wars-y game of any Star Wars game in recent memory.

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And on blockchain, the less said about that the better. But I remain skeptical that blockchain gaming will be anything more than a market for people with dreams of easy money and little care for whether or not it makes sense or provides actual value. (That's not to say blockchain games can't make money; as of this writing GameStop is trading for more than $120, so clearly a stubborn denial of material facts by the masses has some power to keep even a lead balloon afloat for a little while.)

Zynga's last forecast for 2021 called for revenues of $2.78 billion and a net loss of $97 million. Even if Take-Two applies flawless cost-cutting measures without hurting Zynga's ability to grow its business, it will take some time before this deal can look like a clear win for the company.

Who better to appreciate the ability to keep games contributing constantly than the people behind the evergreen Grand Theft Auto 5?

But even if Zynga doesn't find another gear with the Take-Two acquisition, I suspect it will at least be mildly positive for the publisher over the (possibly very) long haul. Without the constant drumbeat of acquisitions (presumably), Zynga can focus on what it has done best: running successful free-to-play mobile games long after they hit maturity. And while Social Point's Dragon City Mobile and Nordeus' Top Eleven haven't exactly been hurting, putting them under Zynga's stewardship strikes me as a good way to extend their window of relevance as long as possible. And who better to appreciate the ability to keep games contributing constantly than the people behind the evergreen Grand Theft Auto 5 (launching on next-gen platforms later this year)?

So even if Take-Two and Zynga have embraced drastically different approaches to get to this point, there's an argument to make that they fit together strategically. Zynga not only provides Take-Two with a key presence in the mobile market, but could also give it the consistent contributions it has craved ever since the bad old days when you could tell if it would have a good year or not based solely on whether there was a new mainline Grand Theft Auto on the release schedule.

The Rest of the Week in Games

STAT | $85 billion - The total amount of mergers and acquisitions activity in the games industry last year, according to investment banking firm Drake Star, three times what was seen in 2020. The Take-Two-Zynga deal suggests the surge in M&A has not yet abated.

QUOTE | "On information and belief, Garena copied Krafton's expressive use of a chicken dinner theme to designate victory where other depictions could have been used to inject joy and whimsy into a game upon winning." - PUBG maker Krafton, in a new lawsuit against Garena, Apple, and Google alleging the Free Fire games infringe on its copyrights.

QUOTE | "Don't simply copy the latest popular app on the App Store, or make some minor changes to another app's name or UI and pass it off as your own. In addition to risking an intellectual property infringement claim, it makes the App Store harder to navigate and just isn't fair to your fellow developers." - Apple's App Store documentation, which was referred to this week when iOS clones of the browser-based game Wordle were pulled from sale. (For what it's worth, Garena Free Fire cribs an awful lot from PUBG, but it might be closer to Data East ripping off Street Fighter to make Fighter's History, which was determined in court to be non-infringing.)

QUOTE | "Money, in the form of that first in-game purchase, is a bigger hook, one that can hold a player through the middle part of the game and get them invested." - Professor at Seattle University Christopher A. Paul analyses why Apple Arcade's subscription service can make games built on free-to-play mechanics far less compelling to play.

QUOTE | "I see video games as a wonderful possibility to share poetry and deep human experiences through games in a much wider world than I can reach with my poems." - 70-year-old Brazilian poet Luiz Sampaio explains why he got into game development two years ago with Wondernaut Studio.

QUOTE | "In the 25 years or so I've been doing this stuff, this is easily the most challenging product I've ever done for all these reasons. VR, new medium, remote development, lack of consumer engagement stuff... Across the board, this has just been unfairly, completely smash-at-the-knees from day one." - 17-bit's Jake Kazdal explains why launching a VR game like its new Song in the Smoke right now is "a perfect storm of shit."

STAT | 100% - The number of Armor Games employees who felt their productivity remained the same or increased during a three-month trial of four-day work weeks. The company has now permanently shifted over to four-day work weeks.

QUOTE | "To focus on production of Xbox Series X/S, we stopped production for all Xbox One consoles by the end of 2020." - An Xbox representative confirmed that Microsoft's last-gen hardware was discontinued over a year ago, giving the system an effective lifespan of seven years from launch. The Xbox 360 was discontinued in 2016, more than a decade after launch. The original Xbox debuted in late 2001 and there are conflicting reports as to when exactly it was discontinued, but it was all but gone from store shelves by the time the 360 launched four years later.

QUOTE | "It is one of the best-selling consoles ever and there is always crossover between generations." - A Sony representative confirmed that the company has no plans to discontinue the PS4 just yet. The system launched the same month as the Xbox One in 2013, and Sony reportedly plans to make another one million units in 2022 to help keep shelves stocked with Sony hardware despite PS5 production struggles.

QUOTE | "For a number of years, we've had a program in place called Queue Dodge. It's a program that lets anyone opt out of Riot within their first six months and get paid part of their salary to help transition to whatever is next. No hard feelings. As we prepare for the next phase of growth, we're opening Queue Dodge for a limited window for any Rioter, however long they've been with us." - Riot CEO Nicolo Laurent explains that the problem with Riot wasn't a lack of diversity or an open and accepting culture, but that the culture wasn't homogenous enough. Although I admit paying people rejected by the company culture a fraction of their salary to go away is a lot cheaper than paying them $100 million to go away.

QUOTE | "We are currently reviewing our partnership with Activision Blizzard, given concerns about the progress being made to address continuing allegations regarding workplace culture, especially the treatment of female colleagues and creating a diverse and inclusive environment. While we complete the review, we will pause the release of a Lego Overwatch 2 product which was due to go on sale on February 1, 2022." - Lego publicly spells out a concrete action it is taking against Activision Blizzard, something we haven't yet seen from the publisher's other business partners.

QUOTE | "The Razer Zephyr and Zephyr Pro are not certified N95 masks, medical devices, respirators, surgical masks, or personal protective equipment (PPE) and are not meant to be used in medical or clinical settings." - Razer clarifies in the fine print on its site that the air purifier masks it advertised as having N95-grade filters in the middle of a pandemic should under no circumstances be thought of as offering N95-quality protection.

QUOTE | "I truly think that people's hearts are in the right place, but it takes trial and error and a lot of folks to communicate what things went right, what things went wrong, in order to progress." - Black Game Developer's Fund strategic advisor Justin Woodward assesses the progress the industry has made in supporting minority developers in recent years in a discussion about the BGDF.

QUOTE | "In a game where there's always a chest behind every waterfall, you get mad as soon as there's no chest behind the waterfall" - Arkane Lyon campaign director Dana Nightingale talks about creating player agency in games, ignoring the fact that I get mad if any game has even a single chest-less waterfall.