Zynga’s New Growth Paradigm
Zynga is sitting on a $1.81 billion cash mountain, is debt-free and able to freely access debt if required, which means major buyouts are a luxury the gaming company can afford.
“We love finding great, accomplished teams that share our mission and vision,” CEO Mark Pincus said. “If we ever see breakout opportunities that massively accelerate social gaming at Zynga, we’ll aggressively pursue those, too.”
Following up on last month’s $180 million acquisition of OMGPop, and having spent $147.2 million on bagging 22 companies in 2010 and 2011, Pincus makes no bones about the fact that more buyouts are planned in the next few years. So how are they going to do it? And what would set them apart from other, content-hungry, cash-rich acquirers?
Here’s a breakdown:
First of course, is price. Zynga is likely to pay good prices to push through a deal. Zynga offers entrepreneurs an opportunity to own stock in a company with which they can identify — not a faceless corporate entity. However, investors often question the price they’re paying. “If they have to every time go out and acquire the next number-one developer for $200 million, how long can you do that?” said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas.
A major advantage for Zynga is Pincus himself — with 36 percent of voting power he talks to candidates from a position of strength. Decision-making is fast and as Pincus says, “We avoid a lot of steps and cycles that other public companies have,” Pincus said. “We’re able to bring the board along with us very quick.”
After money matters are settled, the deal-making process is formalized by merger chief Barry Cottle, and often involves the human resources team meeting with candidates, technical experts making an independent assessment of the technology, and the deployment of Pincus to assuage the target’s apprehensions, if any.
Zynga also wants entrepreneurs to stay with the company, a plus factor it reinforces by offering stock units that vest over two years or longer.
Integration is handled by Guru Gowrappan, head of M&A integration, and appropriately called “The Fixer.” Guru eases the assimilation process for the incoming entity with his expert guidance on everything Zynga.
“The company’s next targets are likely to be mobile-game makers, since it increasingly competes for the attention and dollars of gamers who download apps from Apple Inc.’s (NASDAQ:AAPL) App Store and Google’s (NASDAQ:GOOG) Android marketplace,” said Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles.
A name that pops here is ZeptoLab, maker of top hit mobile game “Cut the Rope.” But there could be others, and according to Pachter, “You are going to have a lot of developers swinging for the fences and trying to hit it fast and hope Zynga will give them a couple hundred million dollars.”