Take-Two Interactive's (TTWO 1.65%) valuation is taking a beating following news that the company plans to acquire Zynga (ZNGA) in a $12.7 billion deal. The gaming giant's share price was down roughly 16% as of 1 p.m. ET on Monday.
The buyout price for Zynga works out to $9.86 per share, which represents a roughly 64% premium from its stock price at market close on Jan. 7, and investors are apparently less than thrilled with the deal. Should you treat the dramatic pullback as an opportunity to buy Take-Two Interactive stock?
The Zynga deal should make a strong player even stronger
Based on Take-Two's stock performance on Monday, it seems clear that the market thinks the company is overpaying to acquire Zynga. While the Zynga buyout is set to proceed at a significant premium compared to the stock's recent pricing levels, the mobile publisher's stock has been looking very cheap lately, and the elevated buyout price is still roughly 20% below the stock's 52-week high.
Take-Two Interactive is best known for franchises including Grand Theft Auto, NBA 2K, and Red Dead Redemption, but the company also owns many other viable gaming properties. Acquiring Zynga should put Take-Two in better position to utilize its franchise portfolio, and the move should also dramatically accelerate the company's expansion initiatives in the mobile market.
Zynga has shown that it can launch and sustain hit properties through downloadable content updates, and I disagree with the market's negative read on the proposed buyout. In addition to bringing in new gaming franchises and proven development and marketing talent, Take-Two expects that the merger with Zynga will create roughly $100 million in cost-saving synergies across the first two years and more than $500 million in additional net bookings opportunities beyond the mobile publisher's normal business.
Take-Two Interactive stock now trades down roughly 35% from the 52-week it high last February, and I think the sell-offs following word of the Zynga deal have presented a worthwhile buying opportunity for investors.