In a previous article "Glu is an Acquired Taste" , I wrote about Glu Mobile's (NASDAQ: GLUU) possible acquirers, which included FB, Zynga (NASDAQ: ZNGA), console gaming companies, the various Brick and Mortar Casinos, or a private equity buyout.
Today, I make the case that Zynga is the best possible match up for Glu, and will provide the most synergies for both companies going forward, especially for Zynga, which struggles to find its place in the world.
Zynga's move away from Facebook, was seen by many as the straw that would finally break the bulldog's back. Downgrades ensued and the stock fell to 52-Week Lows. Looking back, it appears as though Zynga may have known what it was doing after all.
We have seen the meteoric rise and conversely the fall of companies that were dependent upon Facebook's platform. Companies such as Branch Out and Viddy gained much hype and investor backing initially, only to see their number of users dwindle to nearly nothing, as Facebook restricted the amount of advertising/notifications the services were aloud to push through its news feed and notification system. A step away from FB may have actually been Zynga's life or death decision.
Zynga has an ace up its sleeve with Texas Hold'em Poker (Zynga Poker). It's the world's largest free to play online poker game, and that has investors salivating. Zynga has a huge lead on the competition, as user acquisition is the most expensive and difficult part of the equation. The potential revenues from online gambling are staggering, and Zynga stands to capture a large share of that revenue as users begin transitioning from "play money" to real money bets. Zynga has also benefited from institutions regaining confidence in the company on the back of these gambling hopes, as more and more states pass online gambling laws to raise revenue. It is also expected that a Federal law will be passed to give a clear set of laws under which these companies will operate. One standardized law, would be a much easier and secure system than each individual state setting its own rules and regulations.
Glu Mobile is moving into the online gambling space. It partnered with Probability PLC in the UK last year, and made a strategic investment in Bee Cave Games (founded by ex Zynga employees) early this year. This will put it in a position to compete with Zynga for online gambling. CEO Mark Pincus stated that he was not looking to capture the hardcore gambling market, but felt the company was positioned to take advantage of casual online gambling, the same market in which Glu will operate. With such a substantial amount of revenue on the line, Zynga would be silly not to snatch up the competition while its current market cap stands at around $150M. Glu is currently trading around $2.40/share, down from almost $6 last year, and a price that could double very quickly once investors catch wind of the positive changes in the company. Some of which are set to be addressed on March 15, when Glu presents at the 25th annual Roth Capital Partners conference. With a short interest of around 17% holding the stock down, the $2 price tag may not be around for long. Glu's recent releases should provide a nice boost to the bottom line, and enable it to raise guidance and catch some analyst upgrades.
Mobile Gaming Potential
Gambling without a doubt is going to be a money maker for Zynga, but its core business is social gaming. The mobile gaming market continues to grow exponentially with revenues for mobile games expected to be around $8 billion. That number continues to be revised upward as users continue to convert from feature phones to smartphones, and more and more people get their hands on app capable devices as affordability improves. Another catalyst is the short update cycle on phones and technology. As users upgrade every year or two, the secondary market continues to be flooded with more affordable smartphones.
Though Zynga has been successful in terms of the performance of its mobile apps... most of its success has come in the form of acquisitions. The acquisition of OMG Pop was heavily scrutinized, as the company was purchased at the apex of its popularity and cost Zynga $1 billion. Zynga's other successful titles came from Newtoy, the creators of Words with Friends, and DNA Studios, the Creators of Casino City, Slot City, and Barworld. The acquisition-based growth begs investors to ask if Zynga can create successful titles on its own.
As Zynga's -ville type games become less and less popular, it has a strong need to diversify the portfolio with other game offerings. Users are simply getting tired of playing the same games with a different look. With the improvement in mobile capabilities, there has been a major shift to hardcore and 3D games. Glu mobile in particular is the leader in mobile 3D game development. Glu's games perform quite well... earning editors picks, staff picks, and featured status on the various app stores. It also recently had two games named to the Best Games of 2012 by Appzoom, the only company to ever land two games in its top 10 with Blood and Gory, and Contract Killer 2.
The freemium model in which Glu operates has proven to be the dominant form of game monetization on mobile. A quick look at the charts and revenue capture shows that successful freemium games take the bulk of revenues. An acquisition of a true development company that is a proven leader in the space (Glu Mobile) really should be at the top of Zynga's list. It could quickly capitalize on the acquisition by pushing Glu's existing games to the user base, and take advantage of Glu's knowledge of monetization in future titles and releases. It would also add some much needed variety to the games that Zynga currently offers, and allow it to tap into the hardcore gaming market.
Glu develops games across all platforms, and is even putting steps in place to bring its games onto the television. Who wouldn't want to play Zynga Poker while sitting on the couch? How nice would it be to see you ENTIRE farm at all times?
Acquiring Glu and its 75+ games and original content would create a tremendous value to Zynga and its users. The acquisition would take the current 27 games offered on Zynga.com to 100+, putting it closer to becoming a true online gaming portal. Furthermore, Glu's developer platform launched this year, would be especially beneficial to Zynga as it continues to grow its own online portal. Using the platform to promote successful games from small studios for a share of revenue would be a home run. Facebook makes a killing doing this, why shouldn't Zynga?
It's no secret that Zynga has struggled with attracting and keeping talent within the company. An acquisition of Glu would enable Zynga to properly fill these vacancies, restructure, and begin firing on all cylinders again. Glu's CEO Niccolo De Masi could be in charge of mobile gaming, and Pincus could hire a specialist to lead gambling. Having these separate branches would provide a good diversification of the revenue streams, and de-risk the stock in the eyes of investors.
Zynga seems to still be looking for its purpose in life. Pincus needs to make the moves to take himself and investors from the doghouse, to the big house. It has a tremendous amount of opportunity, but instead of continuing to act like a puppy, it needs to position to take over online/mobile gaming, and finally become the BIG DOG it aspires to be.
Disclosure: I am long GLUU.