Uniting Grand Theft Auto and FarmVille Is a Game Changer

Tae Kim

11 Jan 2022, 12:44 PM IST

(Bloomberg Opinion) -- Take-Two Interactive Software Inc., owner of the Grand Theft Auto game franchise, announced plans Monday to acquire mobile gaming leader Zynga Inc. for $11 billion in cash and stock. News of the proposed merger has spooked some investors, who sent Take-Two’s shares down 14% Monday on the belief Take-Two is overpaying. They might want to give the deal a second look.

Under the terms of the agreement, Zynga shareholders will get $3.50 in cash and $6.361 in shares of Take-Two common stock, representing a more than 60% premium to the mobile gaming company’s share price at the close on Friday. That sounds steep, but the deal still values Zynga at a discount to other major game publishers on a price-to-sales basis, and at a modest premium on an earnings basis, using analyst estimates for the next four quarters.

Just as important, the impetus for the deal makes sense. The video game market is roughly evenly split between mobile smartphone games such as Zynga’s popular FarmVille and Empires & Puzzles titles and traditional console and PC-based games like Take-Two’s Grand Theft Auto. That puts any game maker weighted toward one platform at a disadvantage, one that today’s deal aims to repair.

With the addition of Zynga’s nearly 3,000 employees and their expertise on mobile development, Take-Two will be better positioned to develop its games for the smartphone audience. Zynga’s mobile properties, meanwhile, could be made enticing for consoles, joining Take-Two’s hit roster that includes such titles as Red Dead Redemption and Bioshock.

The combined company also will be poised to capture the industry’s significant growth potential. Consumers around the world will spend some $219 billion on video games by 2024, according to research firm Newzoo, up from $180 billion last year.

Another obvious incentive for Take-Two is that the merger should help make its results more predictable. Investors have lamented the lumpiness of the publisher’s revenue, which relies primarily on console titles that take many years to develop. For instance, there was an eight-year gap between the releases of 2010’s Red Dead Redemption and 2018’s Red Dead Redemption 2. And gamers have been waiting eight years already for the next Grand Theft Auto game, with no date set for its release.

Following the merger, Take-Two expects the mobile segment will rise to more than 50% of its bookings — the industry’s primary measure of sales — by fiscal 2023, up from an estimated 12% for the year ending this June.

Take-Two and Zynga together will have the larger scale needed to compete with industry giants like Electronic Arts Inc. and Activision Blizzard Inc. The merger will lead to better revenue growth and more diversification and make it possible to fully take advantage of the gaming industry’s future. It’s worth the risk.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.