Shares of Zynga (ZNGA) rose 41.7% in January 2022, according to data from S&P Global Market Intelligence. The mobile video game developer received a buyout offer from industry-titan Take-Two Interactive (TTWO 0.29%), and Take-Two is paying a generous buyout premium in this deal.
The buyer is paying $3.50 in cash and $6.36 in Take-Two shares per share of Zynga stock. That works out to an enterprise value of $12.7 billion.
Share-based deals are often subject to uncertainty related to movement in the buyer's stock price, but this particular agreement comes with a collar structure. As long as Take-Two's stock trades at an average volume-weighted price between $156.50 and $181.88 per share in the three weeks before the deal's closing, the stock-based payout to Zynga owners stays within a rounding error of the proposed $6.36 per share. Take-Two shares currently change hands for $175 per share, firmly within that spacious bracket.
The collar places strict limits on how Take-Two's price changes might affect the final price tag. Let's imagine that Take-Two Interactive's shares might rise 25% higher before the final John Hancock hits the parchment. In that case, the final payout to Zynga owners will be worth $11.16 per share -- just 13% above the original offer. Similar dampening effects would also come into play if Take-Two's stock falls dramatically.
That being said, the stock will have some time to rise above or sink below those bookends. The deal is expected to close during Take-Two's first quarter of fiscal-year 2023, a period that runs from April 2022 to June 2022. Shareholders of both companies need to approve the merger, and the agreement must go through the usual gauntlet of regulatory approvals. Zynga has a go-shop period on its hands, allowing the company to find a better offer without penalties, until February 24. So far, no superior alternative has materialized.
If the deal is completed, the combined business will continue with Zynga as a subsidiary of the Take-Two organization, under the control of Take-Two's board of directors and management team. The boardroom will expand from eight seats to 10, adding two names from Zynga's current board of directors.
Market makers sliced 13.1% off Take-Two's market value on the day of the announcement. Combined with Zynga's big jump, the deal added $230 million to the total market value of the two stocks in question. However, that combined value has increased by 16.7% since that Monday in January.
In other words, investors are warming up to the idea of adding Zynga's mobile gaming mojo to Take-Two's console and PC gaming empire. The Chartboost mobile-advertising platform alone could pay dividends for Take-Two in the long run, boosting the customer-acquisition effort in key markets such as India and the Middle East.
Assuming that the buyout doesn't run into regulatory roadblocks or negative shareholder votes along the way, Zynga's current owners should consider selling their shares quickly. The stock hovers roughly 9% below Take-Two's firm offer, leaving little room for growth on the open market. The collar setup makes it even harder to recommend buying or holding Zynga's stock today.