U.S. stocks are higher in early Tuesday afternoon trading, with the Dow Jones Industrial Average (^DJI 0.40%) and the S&P 500 (^GSPC 1.02%) up 0.46% and 0.21%, respectively, at 12:50 p.m. EST. Shares of mobile game developer King Digital Entertainment plc are surging, up 14.80% to $17.84, on the announcement that Activision Blizzard will acquire the company for $18 per share.
King Digital Entertainment's blockbuster hit game, Candy Crush, on an iPad. Image source: m01229, republished under CC BY 2.0.
Activision is paying $18 per King Digital share in cash, valuing the company's equity at $5.9 billion. In its press releases, Activision justifies the acquisition price, explaining that it represents a 20% premium over last Friday's closing price, a 23% premium to the stock's one-month volume-weighted average price (VWAP), and a 27% premium of the three-month VWAP.
Premiums are always nice, of course, but when you look back over the entire span of the stock's life, it's a story of discounts and losses.
This column isn't always correct with its prognostications (as the late Yogi Berra quipped: "It's tough to make predictions, especially about the future"), but once in a while, it gets things exactly right. King Digital Entertainment's Saga of the Public Market is one of those instances.
In February 2014, as the mobile game developer filed to go public, this column concluded its assessment of the offering with the following warning:
King Digital Entertainment faces the very same challenges as Zynga Inc: It operates in an industry with low barriers to entry and caters to an audience with a short attention span and fickle tastes, resulting in products with a limited shelf life. Punting on over-hyped growth company IPOs is itself an addictive game; when it comes to King Digital Entertainment, I suggest investors kick the habit.
On March 25, 2014, King Digital's initial public offering was priced at $22.50 per share. The offering was not well received in the secondary market: The following morning, the shares opened two dollars lower and closed at $19.00, a 16% discount to the offering price.
Nineteen months later, the stock has only ever traded higher than its offering price on three trading days, closing above it on a single day (all of $0.03 higher). During that period, the S&P 500 has risen 12.8%.
While it may have been ruinous, King Digital's Saga of the Public Market does contain an enduring lesson for investors: If you invest in a hit-driven business with no (or marginal) competitive advantage, it's very, very tough to make money with any consistency (King Digital's blockbuster hit, Candy Crush, launched in 2012, still accounts for more than a third of the company's revenues). Just ask a very long list of investors who have financed Hollywood film studios; they've been learning this lesson the hard way for decades.
