On Monday Zynga (ZNGA) announced the purchase of A Bit Lucky, a small game developer studio. Although financial terms of the deal are not public, it is estimated the purchase price was between $20 and $25 million, which is quite low relative to Zynga's previous acquisitions.
Price Tags of Previous Acquisitions
The company has invested over $360 million making acquisitions since 2010. Some of the most notorious acquisitions are:
Wild Needle: $3.8M
While Zynga is taking an aggressive growth approach in the company's expansion process, its past acquisitions have not created shareholder value as the stock has tumbled over 65% since its IPO. In fact, management has diluted equity because of the excessive stock options awarded to retain talent. Mr. Pincus and management have been highly criticized for making acquisitions that do not create long-term value, especially in regards to OMGPOP, which lost millions of users since its acquisition and has not met performance expectations.
Hunting for Talent
Today, Wilson Kriegel, formerly the chief revenue officer of OMGPOP, has left Zynga, which makes me wonder if it's the new norm for the company. After other top executives resigned over the last two months, Zynga has been quickly mobilizing to find and attract new young talent with a promising future. After scandals such as the lawsuit alleging that Marc Pincus and some other insiders sold shares before disappointing Q2 results were revealed, Mr. Pincus is finally waking up and making an effort in attracting new talent to flow into the company by acquiring early stage start-ups and essentially buying out the team of developers.
Zynga has thrived in the social gaming space with games such as FarmVille and CityVille. These games are played in short time intervals and are highly attractive to the casual game player. The A Bit Lucky acquisition will help Zynga enter into a new game genre that can be much more lucrative by targeting the game player that spends more time playing games, which can result in higher revenue per user. For example, Zynga's primary audience is the casual game player, while on the other side of the spectrum, there is the hardcore game player that gets home from school or work and plays for hours and hours. This acquisition helps Zynga enter into a new market that lies between the casual and hardcore game player, but most importantly, it positions them for entry into a market where users are more loyal and more likely spend more cash as a result.
As far as I'm concerned, most of Zynga's acquisitions are coming back hunting and yielding lower earnings and a mass exodus of executive resignations. In addition, A Bit Lucky's previous games for Facebook, Lucky Train and Lucky Space were reportedly not very popular and were shut down to focus on Solstice Arena, a promising new game targeting the core player. How about if it does not work out and A Bit Lucky is not so lucky resulting in another flop like OMGPOP? So far, the acquired team seems to have abundant potential, especially with previous successful exits under their belt. In spite of this, nothing has yet crystallized to tell Zynga investors about a new phenomenal product that can potentially drive the stock price higher.
By announcing this acquisition and trying to reach a new niche, Zynga is diversifying its dependence from Facebook's (FB) platform, which is a high risk considering almost all of its revenue is generated from players accessing Zynga games via the Facebook platform. It is clear to me Zynga's management is seeking alternative paths to success beyond its dependency on Facebook's platform to generate revenue, a risk director Reid Hoffman alluded to in the past.
A Bit Lucky will begin working at Zynga's San Francisco office in September 19, but it will definitely take some time for their efforts to positively influence the stock as they are barely planting the seeds for a potential turnaround strategy.