Zynga Buys OMGPOP: Sign of Unsustainable Acquisition Rate?

Zynga (ZNGA) will acquire OMGPOP for an estimated $200 million, adding the popular application "Draw Something" to it's already impressive portfolio of addictive games played on Facebook and smartphones. But Zynga's immediate acquisition of OMGPOP gave some investors a bit of uneasiness.

In some ways, the move was sensible. The acquisition squandered the threat of Zynga being upstaged in its early IPO stage. And consider that Draw Something had been downloaded over 35 million times, with an average of 3,000 drawings completed per second, it's no wonder Zynga wanted to be in on the action. 

Is it sustainable?
Rick Aristotle Munarriz of The Motley Fool calls the acquisition an ugly precedent. "What about next week? What about next month?" OMGPOP came out of nowhere to top the list of Apple's most downloaded games, but it won't be the first company to do so. Will Zynga buy them out one by one?

"Once again, Zynga is delaying the inevitable. It won't be able to snap up every flavor-of-the-month app that bubbles up to the top -- and bubble up they will."

It also serves as a reminder that Zynga had acquired a number of developers in its short history, including Newtoy, the developers of Words With Friends. In fact, Zynga hasn't created a blockbuster game of their own in quite some time. 

"Most of those acquisitions were for talent rather than titles. This is a case where they are buying a title," Brian Blau, research director at Gartner told Bloomberg.

Business section: Investing ideas
Looking ahead, there will be more popular games on the market than Draw Something and Words With Friends, we just don't know what it will be yet. "Maybe Zynga will own one of the games. Maybe it won't."

What do you think the future holds for Zynga? And for that matter, other social media stocks that face similar threats from competing sites?

Use Kapitall tools to dig deeper!

1. Groupon (NAS: GRPN) : Operates an e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount in North America and internationally. Market cap of $11.03B.

2. LinkedIn (NAS: LNKD) : Operates an online professional network. Market cap of $10.01B.

3. Pandora Media (NYS: P) : Operates as an Internet radio company in the United States. Market cap of $1.73B.

4. Zynga (NAS: ZNGA) : Develops, markets, and operates online social games on the Internet, social networking sites, and mobile platforms. Market cap of $9.97B.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman does not own any of the shares mentioned above.

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