The video game industry has been growing steadily in recent years, with the number of regular or situational gamers of 66% among young people over 12 years old now surpassed, and with the growing uptake of eSports, it is expected that this will continue to grow.
Zynga is one of the four largest international online gaming companies, with more than 1700 employees and a very strong growth in recent years, having acquired more than 32 companies since its inception in 2007.
Latest Aquisitions
In view of the sector in which Zynga operates, the mergers and acquisitions of the company are key to being able to have successful games on time, that is, the majority of the more than 32 mergers and acquisitions made to companies with already established games, which are acquired to help their growth and improve monetisation through synergies..
It is important to look at this particular feature, because in an industry where growth is often based on series of games, and it is so difficult to find a game that is able to run for years, acquiring established games is one of the few ways to grow through risk-reducing investments, even if not all of them work out well.
The mergers and acquisitions most relevant ones from Zynga have been the following
In December 2018, Zynga acquired Small Giants Games by $700 millionThe acquisition was motivated by the titles "Empires & Puzzles", "Alliance Wars" and Atlantis.
In May 2018, the acquired company was Gram Games for a total amount of $300 millionThe company has nine titles at the date of the acquisition, including "1010" and "Merge Dragons". In this case, unlike the previous acquisition, the objective was to consolidate the user base in Europe.
In November 2017 the acquisition was of a line of games from the company. Peak GamesThe acquisition was of the "Card Game Studio" line of card games; a fast-growing series of online card games in Northern Europe and Turkey with online tournaments and multiplayer games.
Lastly, worth mentioning is the acquisition of OMGPOP worth $200 million in July 2012. In this case, the acquisition was an absolute failure, it was made after the game "Draw Something" achieved success, however the company since the acquisition started to fall sharply, causing notable losses during 2012 and being closed down a year later in 2013.
The latter acquisition resulted in a large stock market decline and a large loss for the fiscal year due to the loss of goodwill and operating losses.
Revenue Model
Although the company has almost all its games in "Free to play" mode, the company's profitability is largely based on the purchase of tokens or virtual currency in the different games, a model with a fairly recurrent income among games with large numbers of active users.
The cost generated from the sale of these coins is very low, although they can be associated with the generation of items, levels or tests within the games to encourage the purchase of more coins, which means that the EBITDA generated is very high.
However, a steadily growing source of revenue is advertisements. These come in three very different types:
- Banners: These are ads that appear in the same tab as the game but outside the game, i.e. they are a type of satellite ad. These are the least effective, due to their location and therefore are the ones that charge the least per view, however, due to the total number of views they are the ones that generate the most revenue.
- Video spots: These are the type of advertisements that appear before and/or after entering the game and "invade" your screen. In this case they are the ones that generate the most revenue per visit.
- "In game placement! These are camouflaged in-game advertisements, in which either by means of missions or visible in-game logos, different brands can be seen without the advertising being "aggressive", and can be considered part of the game itself.
Financial analysis
As mentioned above, it can be seen how the company is able to generate a good EBITDA, taking into account the large marketing expenses (more than one third of total expenses).
It's also interesting to note how in 2018 Zynga has decided to go into debt to connect new mergers and acquisitionswith which to try to exceed ingame sales revenue and increase user base.
Conclusion
The company Zynga has no recurring revenue outside of in-game sales revenue, which in turn depends on the user base that shifts from game to game, meaning that mergers and acquisitions within the industry they are an imperative necessity for its development, however, it is important to highlight a very relevant fact that is not recorded previously, and it is the risk.
Because the company has this need for mergers and acquisitions not only to grow, but also to be able to maintain the current infrastructureThe risk available to the company is quite high, causing the stock market to heavily punish the company's shares at the slightest negative volatility in earnings, as trends in this industry tend to be long-term and difficult to remedy.