Take-Two pays hefty premium for mobile experiment

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The Zynga logo is pictured at the company's headquarters in San Francisco, California April 23, 2014. REUTERS/Robert Galbraith/File Photo

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NEW YORK, Jan 10 (Reuters Breakingviews) - Take-Two Interactive Software (TTWO.O) is handing a win to Zynga . The maker of big-budget game franchises like “Grand Theft Auto” is buying mobile-gaming specialist which makes “FarmVille” for $12.7 billion, including debt, the companies said on Monday. That’s a 64% premium compared to Zynga’s undisturbed stock price. It’s a hefty payout for the promise of expanding its mobile toehold.

Take-Two made a name for itself selling games on traditional consoles before mobile gaming was a twinkle in players’ eyes. This business is not the same as capturing gamers on their handheld devices. Mobile players tend to be more casual, popping in and out rather than playing for long stretches. For Take-Two, the acquisition is an admission it would struggle to replicate Zynga’s expertise in acquiring customers through data and selling advertising.

There is some strategic logic to the deal, which will pay Zynga shareholders $9.86 in cash and stock. The acquisition should even out Take-Two’s business where the introduction of big sequels makes revenue lumpy. And Zynga won’t have to pay to develop limited versions of say, “Red Dead Redemption,” where fans might be itching for something simple to play on the go. But the market for software engineers is hot, and perhaps some of Zynga’s employees might walk after a buyout.

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Plus it’s far harder to justify the price. The companies say there are $100 million of cost savings. Taxed and put on a multiple of 10, the value of these savings cover less than a fifth of the premium. The companies point to more than $500 million of additional bookings they could generate, an industry metric that is a window into revenue. That’s possible, but equal to about 8% of combined estimated 2021 revenue according to Refinitiv. And it’s more difficult to generate additional revenue than it is to cut costs.

Mobile gaming also suffers from faddish trends, which can make long-term performance and the odds of deals succeeding somewhat inconsistent. Zynga’s own stock price shows this. The company, controlled by its founder Mark Pincus until a few years ago, went public in 2011 at $10. This deal values it at slightly less per share about a decade later. And Take-Two investors, who bid the stock down 13% on Monday morning, seem rightly concerned even that is too much.

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CONTEXT NEWS

- Zynga said on Jan. 10 it had agreed to sell itself to Take-Two Interactive Software in a deal valued at $12.7 billion including debt. Shareholders in the video-game company will receive $3.50 in cash and $6.36 in stock in the rival company representing a 64% premium compared to Zynga’s closing share price on Jan. 7, the last day of trading before the deal was announced.

- Zynga shareholders are expected to own between 29.6% and 32.8% of the combined company, including shares associated with the expected settlement of two outstanding convertible notes issued by Zynga.

- Zynga’s initial public offering was in December 2011, when it sold shares at $10 each.

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Editing by Lauren Silva Laughlin and Amanda Gomez

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