Zynga’s Competitive Landscape Post IPO
In just a month after Zynga’s successful IPO, the battle to be the leader in mobile gaming has intensified between two heavyweights, Zynga (ZNGA) & Electronic Arts (EA) with more merger and acquisition activity and strategic hiring taking place almost monthly. This activity continues to point to a growth strategy for both companies that is centered around acquiring mobile gaming intellectual property and publishing talent to take advantage of the hyper growth in mobile games spurred by the massive adoption of mobile devices.
Although Zynga has been unsuccessful in a few significant acquisition attempts including the Popcap failure I wrote about in the September 2011 article, they are winning big victories in the acquisition of key individuals hired from rivals. So let’s take a look at the recent success and failures of Zynga’s growth by acquisition strategy as it relates to buying key competitors outright and in poaching key competitors’ executive talent. This will lead us to the next potential Zynga acquisition target.
It began in April 2011 when Zynga snatched EA’s COO John Schappert to fill the same position at Zynga. At EA, Schappert was a driving force into their digital future as he oversaw the emergence of EA’s online game studio and the acquisition of Playfish.
Now as the COO of Zynga, John Schappert is very clear about Zynga’s M&A interests expressed in this interview last month:
With respect to M&A, it remains the same — we’re actively looking for great teams, studios, IP…. when we find those, it’s a great add to our company. In terms of larger acquisitions? We’re looking at a lot of different companies of all different sizes, and we’ll see what makes sense.
To execute this growth by acquisition plan more effectively, Zynga just lured more talent away from EA last week by hiring high-profile executive Barry Cottle, who served as the EVP Electronic Arts’ interactive division. Cottle was key to EA’s push toward digitization and oversaw EA Mobile, Playfish, and Popcap. At his new Zynga post as EVP of business and corporate development, Cottle will be in charge of acquisitions.
These Zynga hiring actions seem to show that Zynga’s CEO Mark Pincus is intent on bringing in the executive talent of competitors, even if he is unsuccessful in acquiring their employers outright.
To get a short list of Zynga’s next potential acquisition targets, you just have to look at their S-1 filing, where you will read:
As we continue to devote significant resources to developing games for those platforms, we will face significant competition from established companies that may have far greater experience than us, including Electronic Arts Inc., DeNA Co. Ltd., Gameloft SA, Glu Mobile Inc. and Rovio Mobile Ltd.
With valuations in the $6 billion range, Electronic Arts and DeNA Co. Ltd. would clearly be too large for Zynga to acquire (and Pincus seems to be focused instead on acquiring their key executives), but Zynga has reportedly taken takeover shots at two of the competitors on their list – Rovio & Storm8 – with no success.
According to a recent New York Times feature article on Zynga,
Several start-ups have also rebuffed Zynga this year, including Rovio. This summer, Rovio, the maker of the popular mobile game Angry Birds, walked away from discussions of a deal worth roughly $2.25 billion in cash and stock, three people briefed on the situation said.
And, Zynga also failed in an attempt to acquire Storm8. According to this August 2011 article, Zynga was a bidder, but decided to pursue other targets, “We’ve also heard that Zynga was bidding hard on the company, but stepped away after the deal got too rich.”
So, from Zynga’s self-published competitor list, the next likely acquisition target could be fast growing Glu Mobile (GLUU).
Zynga’s Likely Next Acquisition Target: Glu Mobile
Zynga’s failure in acquiring Popcap, Storm8, and Rovio, combined with Glu’s amazing growth and cheap current valuation, make them a very attractive takeover target right now. And with the hiring of mobile gaming acquisition guru Barry Cottle, Zynga is positioned to be a more formidable suitor in their next takeover bid.
Recent Glu Mobile growth numbers (as of Sept. 30, 2011) include:
-22 million monthly active users
-2 million daily active users
-306% smartphone revenue growth YoY
-81% gross margins
The current market cap of Glu Mobile is only $194 million, which is less than 3 times full year 2011 revenue guidance of $67-$68 million. And, Glu Mobile is guiding for profitability by early 2013.
This attractive valuation is being noticed not only by potential acquirers but also by Glu insiders like director Matthew Drapkin. In the last 30 days, Drapkin has purchased 700,000 shares in the price range of $2.99 - $3.00 per share. A very bullish clue to the company’s value right now.
Based on Zynga’s focused interest in acquiring its competitors, Glu Mobile is an interesting takeover target that appears to fit Zynga’s growth strategy perfectly. If Zynga was willing to make bids for Popcap at $1 billion (or 10X revenue) and Storm8 close to the same amount, an offer price for Glu Mobile at that same takeover premium, or $680 million (10X 2011 revenue or $10 share) seems very reasonable. That makes today’s $3.00 share price for Glu a very interesting value proposition for investors looking for speculative takeover targets.
Disclosure: I am long GLUU.