What Makes Zynga a Winner
Apr 24th 2012 1:06PM
Updated Apr 24th 2012 4:14PM
Game maker Zynga (NAS: ZNGA) went public not too long ago, and has already succeeded in creating quite a buzz. While some believe that the company could be an outperformer, others think it's just a waste of investor money.
While it's true that the company lacks talent and originality, its commitment to acquisitions makes up for its shortfall. So, it's important for you to check out how that's likely to benefit the company in the future.
Strategic game plan
Zynga has acquired a whopping 22 companies in 2010 and 2011 for a total outlay of around $150 million. Taking its buying spree one step further, it recently acquired OMGPOP in a $180 million deal, the prime attraction being the Draw Something game, which gained a lot of popularity within a short span of time.
Zynga, which has not made a blockbuster game in a long time to match up to its FarmVille and CityVille offerings, has consistently been eyeing small acquisitions in order to recruit fresh talent from such companies. In fact, of the more than 2,500 people that work for Zynga, 17% have come in through acquisitions.
Zynga's fishing them out
The fact that the company made an average of one acquisition every month in the past two years is not just commendable but questionable as well. How is it so easy for Zynga to fish out companies and convince them to be taken over?
Well, here's why small companies fell and will continue to fall into Zynga's fishing net.
First, the entrepreneur-friendly feature works for Zynga, as the company does not force acquired counterparts to fundamentally change their work processes, giving them freedom to operate in a way already suited to them. Since Zynga poached Electronics Arts (NAS: EA) executive Barry Cottle, the latter has been rebuilding a merger team which would take care of various aspects related to acquisitions, such as speeding up the deal, outbidding rivals, and looking for better ways of retaining talent. In fact, it was Cottle who played a pioneering role in Electronic Arts' acquisition of Playfish. But the good thing is that while both Zynga and Electronic Arts rely on Facebook for featuring their games and subsequently generating revenue, Zynga has been making a conscious attempt to reduce its dependence on Facebook lately.
The Foolish bottom line
With around $1.8 billion in cash, Zynga is reasonably well placed to execute its acquisition plans. The fact that the company has no debt at present only strengthens its position to secure funds for such deals.
Zynga can use its pile of cash to do one of two things: Either buy up small companies and hope they come up with winning products, or target those companies whose games have acquired recent popularity. With games being an unpredictable proposition, the second method is admittedly more risk-free for Zynga. At the same time, these steps will also help the company attract more small but talented startups -- potential winners in the long run.
Whether Zynga's strategic acquisitions will be its ultimate trump card is something that only time will tell. Till then, keep a close watch on this stock. Add Zynga to your Free Watchlist now. Zynga is a new player in the market that may or may not interest you. But Motley Fool analysts have identified three big-name companies that are particularly well-positioned to profit, and you can learn more right now with our new free report: "3 American Companies Set to Dominate the World." It's completely free for Fool readers but only for a limited time -- so grab your copy now.
At the time this article was published Fool contributor Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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