Zynga’s Big Acquisition Makes Perfect Sense

gta vi

Zynga (ZNGA) a popular game company is buying Natural Motion from the United Kingdom for $391,000,000 in cash plus 39,800,000 shares.

CEO Don Mattrick, who left Microsoft (MSFT) to take over at Zynga in July is moving away from the PC where players play for free and switching to smartphones and tablets where players may download applications for at least a few dollars.

Zynga has been losing a lot of money lately. $404,316,000 in 2011 and $209,448,000 in 2012.

Clearly, the business model of letting everybody on Facebook (FB) play for free is not working.

It seems you cannot really sell too many products or services to a consumer that cannot even afford to pay Electronic Arts (EA) $19.99 for Command & Conquer: The Ultimate Edition which includes 17 games.

Annual sales are still growing from  $597,459,000 in 2010 to $1,140,100,000 in 2011 to $1,281,267,000 in 2012 and that means you can still ask the banks for a few loans.

The strategy is very simple, you use the cash from the banks to buy a game company that is already profitable to replace the revenue from the unprofitable Facebook games you are going to delete soon.

Natural Motion reported sales of $62,000,000 in 2013 which means you can now close several Facebook games that are selling up to $62,000,000 and the revenues for 2014 will remain unchanged which is something every shareholder wants.

If Natural Motion is actually growing revenue then revenues for Zynga should go up in 2014 and that is a good thing.

Natural Motion cannot save the company by itself because the losses are too massive but it is a step in the right direction if you consider Natural Motion will add at least $15,000,000 in profits to Zynga in 2014.

Don Mattrick still needs to find at least 5 more small and profitable private game companies  with similar revenues and profits before he can stop the bleeding.

If you happen to be the CEO of a game company with revenues of at least $10,000,000 then you should buy at least five more small game companies in order to create a larger company that Zynga may buy and everybody wins.

Just don’t take any checks. Demand a payment in shares. This company is going to become a $10 billion company in a few years assuming they keep buying at least one profitable game company each quarter.

Take Two Interactive Software (TTWO) used Euforia in Grand Theft Auto IV, Max Payne 3 and Red Dead Redemption.

If Zynga acquires another middleware company that is currently being used to build Grand Theft Auto VI they could one day many years from today become an important player in the game industry.


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