Why Take-Two Investors Arení»t Feeling the Zynga Acquisition

Why Take-Two Investors Arení»t Feeling the
Yinchen Niu/Variety Intelligence Platform

Take-Two Interactive investors must not be feeling “forever” fever.

Since the video game publishing group announced an enormous push Monday into the mobile games space via an agreement to acquire Zynga, Take-Two’s share price had fallen by roughly 14.5% just before noon ET. By Tuesday afternoon, the stock had rebounded slightly, by 3.9%.

Take-Two chairman and CEO Strauss Zelnick told CNBC Monday that Zynga’s “‘forever franchises,’” including games “Farmville” and “Words With Friends,” were the main motivator behind the acquisition.

So why isn’t Zynga wowing Wall Street? The acquisition does represent a significant source of additional revenue for Take-Two, even if earnings from its online games fell slightly after more than a year of consistently high growth.

Valuing the mobile giant at $9.86 per share for an implied enterprise value of $12.7 billion, it’s a pricey addition to a suite of publishers that includes Rockstar (“Grand Theft Auto”), 2K Games (“Borderlands”) and newer subsidiary Private Division (“Kerbal Space Program”).

It mirrors Activision Blizzard’s acquisition of King in 2016, which granted the “Call of Duty” publisher an additional revenue stream led by popular mobile titles like “Candy Crush” and has since sported impressive revenues from mobile. Adding Zynga to its publishers will certainly position Take-Two to better compete against leading publishers like Activision Blizzard and EA.

But investors may be fearing the Zynga acquisition signals a lack of confidence in Zelnick’s own forever franchise: “Grand Theft Auto.”

“Grand Theft Auto V” and its online component are still on deck to hit next-gen gaming consoles in March, following a delay from their planned next-gen debuts in November 2021. The original date would have seen the game’s next iteration release around the same time a collection of three remasters of older games in the franchise that were met with poor reception from critics and fans alike.

As such, Take-Two's flashiest live service will now have to make its third console debut with serious goodwill to earn back, all while a new installment in the franchise has yet to be formally announced.

More than that, the Zynga buy comes after Take-Two had already made serious investments in mobile, with results to show for it.

After first buying Spanish mobile publisher Social Point in 2017 for $250 million, Take-Two went on to acquire mobile studio Playdots (“Two Dots”) for $192 million in 2020 and then Nordeus (“Top Eleven”) for $378 million in 2021, leading to a nearly 100% year-over-year increase in mobile revenue for Q3 2021 after the company unveiled its T2 Mobile Games division and began disclosing specific earnings for mobile in its quarterly reports.

Plus, the company in May 2021 had announced its strategy to put out a slate of 62 planned releases by the end of its fiscal 2024, 20 of which would be mobile games. Given that Take-Two was already making calculated mobile studio buys before Zynga, investors are likely interpreting the acquisition as a bridge too far, especially since Zynga itself had been doing the same.

Zynga’s entire strategy was built around seizing control of studios that already had very successful mobile titles, and those games were geared towards the hypercasual and social gaming markets, a very different universe from the guns-blazing open worlds of Take-Two's AAA games and competitive sports titles.

If Take-Two is hoping the Zynga purchase is their best bet for rapidly releasing mobile versions of top IP, Zynga’s teams aren’t necessarily the right developers for that, as much as Take-Two would like to maximize the in-game spending and ad spend popular mobile titles provide.

After all, “Call of Duty: Mobile,” a huge source of revenue for Activision Blizzard, is developed and co-published by Tencent; Activision’s sister division King has nothing to do with that title.

MoffettNathanson still anticipates solid boosts in revenue for Take-Two starting in its fiscal 2023 before earnings skyrocket past $6 billion by 2025, but that latter projection is driven mostly by the expectation a new “Grand Theft Auto” release will have transpired in fiscal 2024.

“Without regard to any revenue synergies, we expect the combined company to grow its topline around 14% annually for the next three years throughout FY24,” is what Zelnick projected to CNBC.

If Take-Two remains unable to assure investors its strategy predating Zynga and led by “Grand Theft Auto” is still in tip-top shape, then the company must prove to the market in the next three years that it knows how to move mobile mountains and make the most of its robust addition to the family.