By Ben Kolada, Scott Denne
Zynga's (NASDAQ:ZNGA) reach for NaturalMotion shows that it's interested in more than temporarily addictive games. The acquisition is by far Zynga's largest - costing $487m in cash and stock (excluding nearly $40m in employee-retention stock payments) - and arguably its most expansive in terms of new technology. Whereas its second-largest purchase, OMGPOP, was more of a flavor of the month, NaturalMotion provides Zynga with hit games and attractive animation middleware.
As its core gaming business began to take off, so too did Zynga's M&A program. In 2011, Zynga acquired 10 businesses, followed by another eight purchases in 2012. However, as financial troubles began to settle in, the company toned down its M&A activity, announcing just one acquisition last year.
It's previous purchases have been nearly all small deals done for gaming IP, tech and talent. Excluding NaturalMotion, Zynga disclosed paying more than $10m for just two acquisitions - $180m for OMGPOP in March 2012 and $10.2m for Facebook game developer A Bit Lucky in September 2012.
The OMGPOP buy was a capstone of Zynga's M&A strategy, giving the company ownership of the hugely popular maker of the 'Draw Something' mobile game that had been live for all of six weeks. But the deal didn't pan out as expected. Instead of a revenue jolt or a gateway to new mobile business, Zynga saw its daily users drop by half and took a $95m write-down on the transaction within a few months of closing.
Like OMGPOP, NaturalMotion has a big mobile hit in 'Clumsy Ninja,' but it also has animation middleware that has led to licensing deals with movie studios and other gaming vendors. The outside interest in NaturalMotion's core technology suggests that Zynga looked for an asset and team that could boost many games in its portfolio, not just another one-hit wonder like OMGPOP. And the valuation further demonstrates that Zynga is willing to pay up for the possibility to expand beyond its core markets. Zynga is paying $487m in cash and stock and another $40m in stock for continuing employees. Excluding the retention payments, the deal values NaturalMotion at 7.8x last year's bookings. (We've made our full M&A record publicly available here.)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.