2 Questions Take-Two Shareholders Must Ask After the Zynga Acquisition

The news of Take-Two Interactive's (TTWO -1.35%) acquisition of Zynga should cause shareholders to carefully consider whether they want to remain an investor. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributor Toby Bordelon discusses the deal terms and what shareholders should ask themselves.

Toby Bordelon: Zynga, the acquisition by Take-Two, officially closed on Monday, just two days ago. This is timely news we're ringing for you, Fools. Why is this important? Why is this acquisition important? Well, it's important if you're a Zynga shareholder or you were a Zynga shareholder and if you're a Take-Two shareholder because this acquisition was the consideration for this deal was both cash and shares. So if you were a Zynga shareholder, now you own shares of Take-Two, in part. If you were a Take-Two shareholder, now the company you own looks a little bit different because it's a significant acquisition. So what you want to do in both cases, whether you were a Zynga or Take-Two shareholder, or both maybe, you want to sit down, you want to think about this company and you want to make a decision on whether you want to continue to own this combined company going forward. I would suggest to everyone, don't be passive about this. Take the time to really make sure you understand what's going on here with this new company and be active. Say, "Do I want to own this company going forward?" That's important to do. Let's take a review quickly of what those deal terms were. This was $12.7 billion implied enterprise value for Zynga. It was around $3.50 a share in cash, stock worth about a little over $6 a share of Take-Two stock. This was a 64% premium to what Zynga's price was before the deal was announced, before news leaked out. So a very significant premium, very significant premium for this business. Now, here are some of the benefits they were telling us about. They expect to see about $100 million in synergy. They're thinking 50% of our net bookings are going to come from mobile. Mobile is part of the key here. This is what Take-Two wanted from Zynga, getting more active into the mobile space. Just a quick look, you can see some of their brands here that you may be familiar with. Some of these companies, Zynga Poker, Words With Friends, coming to Zynga. On the Take-Two side, you've got Grand Theft Auto, Borderlands, NBA, 2K, Red Dead Redemption, fantastic game, some of that stuff going on there. What do you want to think about? You're thinking, do I want to own this company going forward? What's it going to look like? Well, Zynga's earnings for their first quarter they released not too long ago, not the best. Revenue up 2% only. Bookings actually down 3%. An increasing net loss and burning cash. There's some concern maybe there. How do we get that business back to cash flow positive profitability, Take-Two earnings, more of a mixed bag. Revenue was up 11%. Bookings up 8% on a net income basis and a cash flow basis. That was down. Digitally delivered bookings for Take-Two were up 4%, 91% of net bookings really against that digital space there. So, you're seeing some promise. You're seeing some struggles. They have work to do controlling their costs, getting these businesses working together. Take-Two did predict about a little under $4 billion in bookings for the next fiscal year and not including Zynga. They wanted that combined business to be over $6 billion in bookings. I think we're probably going to get there if things go well in this next fiscal year, but it's going to take a couple of quarters. Be patient, let them work this through. A big allusion like this does take some time. There is hope and there's promise. I think we'll see how this works, but you're going to need a quarter or two or three to really get a good sense of how this is working out, and whether this business is going to be able to deliver solid results going forward.

Brian Feroldi: Toby, there's been a lot of consolidation in the video game industry, and a lot of the results that Zynga just reported are pretty typical. We've seen the huge slowdown in video game sales. Big question though is, do you like this combined business as an investment moving forward?

Bordelon: Brian, I do. I think there is some opportunity here. Potentially, you could create something more akin to what Activision (ATVI) was without their issues as the best case scenario. Combining casual, mobile-focus gaming with a big budget intense gaming, Take-Two is more known for. Maybe some potential to smooth out revenue between those two businesses to make them more well-rounded businesses in the space attacking both big temporal games and that casual space. But I think you need both going forward now. You're right, there's a lot of consolidation in the industry. I think, as a company, you got to either participate in that or you're going to get left behind. We'll see how it goes. But I do like these two businesses together more than I would like either one of them separately, I think, right now, given what's happening in the space.