Zynga: Acquisition By Take-Two Is A Very Honest Deal (NASDAQ:ZNGA)


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Investment work

Zynga (ZNGA) had fallen completely out of favor since summer. There are several reasons for this. First, technology had generally fallen out of favor in the past two months. Second, Zynga’s near-term outlook had essentially dried up.

As you will read in the analysis, Zynga had very little room for maneuver as its balance sheet was in net debt and sales growth rates were starting to fizzle out.

Shareholders who are getting close to $ 8.50 in the market right now should take this opportunity. Here’s why:

Investor sentiment in advance

Zynga stock priceData from YCharts

In June I wrote about Zynga that

[…] It’s hard to say the stock is dramatically undervalued. If we take the adjusted EBITDA number, the stock is currently valued at 27 times its forward EBITDA. This isn’t a particularly attractive valuation for a company with inconspicuous organic growth.

Zynga stock price

Zynga stock price



Including the purchase price, investors are still down 4% since June if we factor in the full deal price of $ 9.86. But even this price carries significant risks and uncertainties as the completion of the transaction is not guaranteed and the Take-Two (TTWO) share price itself could continue to sell out.

Then, in October, I revisited Zynga and concluded with:

Zynga is valued at 12 times next year’s earnings. This is nowhere near expensive.

Zynga stock price



And while I recognize that even a monkey throwing darts can be right on occasion, I’ve actually put that investment on either side of the equation.

So I believe I am in a better position to make my own comments than the Wedbush Securities analyst who thinks the deal is a “bargain”.

Zynga’s sales growth rates are fizzling out

Zynga sales growth rates

Michael Wiggins DeOliveira

Source: author’s calculations; ** Corporate governance

At first glance you can see a rapidly growing company. In fact, by the third quarter of 2021, you see a company growing its revenue 40% year over year. Zynga clearly had a lot going for it, didn’t she? Yes and no.

Yes, Zynga was well positioned in the mobile gaming industry. Most of the recent growth, however, was due to the large acquisition of Peak for $ 2.1 billion early in the third quarter of last year.

With that in mind, you can see that Zynga’s forecast for 2022 points to low double-digit growth rates (see above).

And here’s the problem, Zynga’s growth strategy was too expensive. Every time they wanted to make a needle-moving acquisition, it had to get bigger, more expensive, riskier, and more time-consuming.

As a result, management emphasizes in the letter to shareholders that after paying its earn-out obligations through 2022 after the first quarter of 2022, Zynga will seek to increase its cash flow through further acquisitions.

Zynga balance sheet

Zynga balance sheet

The problem with this strategy is that the balance sheet wasn’t as flexible. Zynga’s balance sheet was already in net debt, which would limit its ability to meaningfully leverage it.

Evaluation – Why this buyout makes sense

Note that Take-Two will generate $ 500 million in synergies over time from the acquisition with Zynga. In fact, synergies are only expected to be $ 100 million over the next 2 years! Think about it.

Most companies struggle to predict the next 12 months. After two years, at $ 100 million, this is basically all of the low hanging fruit that Take-Two can make from Zynga.

For a company with a combined enterprise value well in excess of $ 20 billion, $ 100 million is a rounding error.

What’s the lesson here?

The lesson here is twofold. First, you should give preference to buying from companies where management has a lot of hand in hand.

Zynga proxy

Power of Attorney Form

As you can see above, of approximately 1.1 billion shares outstanding in Zynga, CEO Frank Gibeau held less than 1% of the company’s stock. Yes, options were being given away every year, but the actual in-game CEO skin was minimal here.

Second, if you choose not to buy into companies that have a lot of hand in it, make sure you are extremely price sensitive when averaging your position.

The bottom line

Given that I have been able to fairly accurately capture the fair value of this deal over time, I can reasonably say in my opinion that Zynga investors are getting a fair price on this deal.

Ultimately, as you can see from the $ 100 million synergies to be found over the next two years, there is simply not much to salvage from this situation. And while I acknowledge that not everyone will be happy with the value of this transaction, especially the shareholders who bought the stock prior to results for the second quarter of 2021, these things are happening. No offense. Take Zynga’s stock price and go. Good luck and have fun investing.

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