Zynga acquires Peak Games for $1.8bn

By Aron Adamski, BSc Economics @LSE


Overview of the acquisition

Zynga, a developer of games such as FarmVille (btw my Mum’s favourite one), acquired Istanbul-based Peak Games, a developer of one of the highest-grossing puzzle games such as Toon Blast, on June 1st 2020 for total consideration of $1.8bn.

The transaction is thought to have a price-to-sales multiple of 2.7x based on Peak’s LTM sales and the deal is financed through an equal split between cash and stock: $900m in cash and $900m in stock.

P+P Pöllath + Partners advised Earlybird Venture Capital on the sale.

Zynga’s investors seemed to support the deal when it was announced, sending Zynga’s stock up by 5.6% to $9.66 per share (~ 8-year high). As of June 4th 2020 it is trading at $9.3 per share, lower than immediately after the deal, perhaps indicating an adjustment of investors’ confidence due to the prediction of a 2020 full-year net loss for Zynga of $130 million.

What is Zynga?

Founded in 2007, Zynga is an American social game developer, with a mission to connect the world through games.

Zynga’s games are available in more than 150 countries and are playable across social platforms and mobile devices worldwide.

What are Zynga’s highest grossing games?

Last month = May 2020

What are Zynga’s key sources of revenue?

Zynga generates its revenues from two sources: Online Games & Advertising.

Online Games refers to in-app sales in all of Zynga’s games and accounts for 80% of total revenues.

Advertising refers to revenues generated by Zynga through advertising services by helping marketers reach and engage with their audience in a targeted manner. It accounts for 20% of the total revenues.

Annual revenue generated by Zynga from 2008 to 2019, by segment.

What are some of the key performance indicators (KPIs) for Zynga?

  • 5% increase of daily active users (DAUs) to 21mn in Q1 2020 from 20mn in Q3 and Q4 2019
  • 7.5% CAGR of revenue between 2014–2018
  • $191m EBITDA based on LTM data as of Q1 2020
  • 44x Enterprise value-to-EBITDA multiple (EV-to-EBITDA) based on LTM data as of Q1 2020
Adjusted EBITDA of Zynga worldwide from 2014 to 2019.

Based on the above KPIs, Zynga’s most recent financial performance was relatively good.

The net losses of $130 million predicted for this year aren’t due to operational difficulties, but as result of the fair value adjustments and stock-based compensation expenses.

Zynga is projecting full-year 2020 revenues to increase by 21% to $1.6 billion, indicating that the company is in a good health.

What is Peak Games?

Founded in 2010, Peak is an Istanbul-based “unicorn”.

The game developer is famous for its franchises: Toon Blast and Toy Blast.

The two franchises collectively have more than 12mn average DAUs. There were more than 400m installs all over the globe for both games combined.

Toon Blast, which ranks among the top 10 highest-grossing mobile games, competes with the likes of Candy Crush in the so-called match three puzzle category.

Last month = May 2020.

Until now Peak was backed by venture capitalists including Endeavor Catalyst, Earlybird Venture Capital, and Hummingbird Ventures.

Peak Games’ relationship with Zynga isn’t new, it dates back to 2017 when Zynga bought its mobile card games studio for $100m.

Interestingly, Peak only has 100 employees, compared to Zynga’s 1,777, so it’s a small, but nevertheless a very successful start-up.

How do mobile games make money? A closer look.

How free games are designed to make money? ©Vox

Why should you watch the mobile gaming industry closely?

Mobile gaming industry has been a bright spot in the COVID-19 pandemic as people stuck at home look for ways to entertain themselves. However, mobile gaming industry has been the one to watch even before the pandemic.

  • Number of smartphone users grows continuously and is expected to reach 3.8bn by 2021
Number of smartphone users worldwide from 2016 to 2021.
  • At the beginning of the year global mobile game revenue was expected to grow by 12% to $77bn in 2020, but due to the pandemic we will likely see larger growth figures
  • 50% of mobile app users play games, making this app category as popular as music apps, second only to social media
  • Mobile games account for: 33% of app downloads, 74% of in-app consumer spend & 10% of all time spent in apps

Mobile gaming offers consumers a convenience of being able to play games anywhere, anytime, on devices we always have with us. Gaming consoles can’t offer the same accessibility.

As result, in the coming years we will see a rapidly expanding demand for mobile games and huge growths in revenues and profits for developers. Over time there will also be a consolidation of the market between the biggest game developers.

What’s the rationale behind the acquisition?

Expansion of the user base ~ Peak’s users

The acquisition is estimated to increase Zynga’s user base by 60%, or 12m people. That’s expected to translate to more than $200m in additional annual revenue.

The growth of the user base may be amplified by the Coronavirus which left many people stuck at home, playing mobile games more often. Hence, the timing of the acquisition may play in Zynga’s favour.

Human capital ~ Turkish talent

Peak is the fourth Turkish gaming company to be acquired by a foreign owner over the past five years. It is the second start-up in Turkey bought by Zynga, previously they bought Gram Games for $250m in 2018.

Looking at the rate of acquisitions in Turkey it would be fair to say that Turkish developers are a very sought after asset. Expertise of Peak Games’ developers may certainly help in Zynga’s in-house development of new mobile games. This could enable Zynga to grow faster and expand its market share quicker.

New markets ~ match three puzzle

Before the acquisition Zynga didn’t have any major games in the match three puzzle category. With the two major games in this category now in their portfolio, they will be able to leverage the expertise of their 1,777 employees to innovate these games and challenge Candy Crush which singlehandedly generates 5% of revenue in the US market for iOS games.

Match three puzzle category is the biggest revenue contributor in the US market for iOS games, accounting for 20% of the market share.

Hence, the growth potential is big and Zynga has the resources to bolster their presence in new markets.

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