4 Big Wins for Take-Two's Zynga Acquisition

With Zynga (ZNGA) getting acquired by Take-Two (TTWO 2.04%), investors need to ask themselves if they want to own a combined company. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 16, Motley Fool contributor Toby Bordelon discusses why it's important that investors are proactive about their decision-making before the deal closes.

Toby Bordelon: Zynga. Quick update on the fourth-quarter earnings. Revenue up 13% to $695 million. Bookings up 4% to $727 million, not awesome that bookings are slowing relative to revenue growth. Again, that's not what you want to see there. Bookings, again, represent orders they have, but they haven't earned that revenue yet because there may be a subscription term associated with that. They earn that over time. Costs of revenue is 37% of revenue versus 41% of revenue last year, which is nice to see those expenses coming down. They are still losing money, $7 million net loss. But you know what, guys? Those earnings are largely irrelevant right now because Zynga, like its fellow gaming company, Activision (ATVI), is being acquired. Take-Two, the other big gaming company out there, is acquiring Zynga. Here are the deal terms announced on January 10. You see that the value is a little less than $10 a share, $3.50 in cash, $6.36 worth in stock. That might move around a little bit. The actual shares you get based on how share prices move and change up until closing. That's roughly where it's going to be. The deal values Zynga at about $12.7 billion enterprise value. This is a 64% premium for Zynga shares. That's astonishing, but that's a really nice premium for you if you are a Zynga shareholder. They expect to close by the end of this June. Take-Two has already $2.7 billion in financing committed that they're going to use for that cash portion. They'll fund the rest of it out of operating cash, generating cash on hand. The Zynga team, including the CEO, is going to lead the combined mobile studios for the two companies. Now when this deal was announced, I thought to myself, this makes Take-Two look a lot like Activation Blizzard. It puts them in that category of a very strong, solid mobile component. A week after that, Activision gets acquired by Microsoft (MSFT 1.57%), so that happens. But it does, I think, make Take-Two a very solid competitor in the market. You look at some of the benefits of the transaction. They're talking about $100 million in synergies within two years. You never want to hear synergies if you work for the company, but there you go. Fifty percent plus in combined bookings expected from mobile. This is a big mobile play for them in fiscal year 2023. The whole market, the mobile game market in 2021, $136 billion in estimated gross bookings. You can see the possibility there. You can see the market potential they're going after. They say they expect to get up to about $500 million in annual net bookings over time. That will be great from the mobile division there, but they don't tell us exactly the timeline over time. There is a go-shop that expires February 24. Meaning, management from Zynga does have the opportunity to get a better deal. I have heard nothing about that and nothing has materialized. I would not expect it to. Again, 64% premium. I'm not sure anyone else is going to materialize and is willing to pay more than that. If you own Zynga shares, you do need to remember two-thirds of this deal condensate to stock. Make an assessment. Before the deal closes, make an assessment. Do you want to own a combined company going forward? Take a look at that. Make a decision. Don't just let it happen and then try to decide after the fact. You want to be proactive about that. That would be the one suggestion I would offer. Hey, you're getting a nice premium here. Again, I want to emphasize that. I think you're probably fairly happy if you're a Zynga shareholder.