What: Shares of mobile game developer King Digital (NYSE:KING) rose on Tuesday following the announcement that the company was being acquired by Activision Blizzard (NASDAQ:ATVI). At 11:30 a.m. Tuesday, the stock was up about 14.5%, just shy of the offer price.
So what: Activision, a major game publisher best known for Call of Duty, World of Warcraft, and Destiny, agreed to pay $18 per share for King Digital, a 20% premium to the Oct. 30 closing price. This price values the equity at $5.9 billion, with an enterprise value of roughly $5 billion after backing out the excess cash on King's balance sheet.
Activision expects the deal to increase its non-GAAP earnings per share by about 30% in 2016. The acquisition gives Activision a major foothold in the mobile gaming market, where King's Candy Crush Saga franchise continues to be extremely popular, as well as in emerging markets where Activision's presence is currently limited.
King will operate as an independent operating unit of Activision, and King CEO Riccardo Zacconi will remain in his position. The companies expect the deal to close by Spring 2016.
Now what: This acquisition appears to be a very good outcome for King shareholders. The company went public last year at a price of $22.50 per share, but concerns about its overdependence on Candy Crush Saga have been a drag on the stock ever since. In King's latest quarter, sales and profits slumped as new titles were unable to counteract the ongoing decline of its biggest game.
Had King remained independent, it may have suffered the same fate as rival Zynga (NASDAQ:ZNGA). Zynga found early success with the incredibly popular FarmVille franchise, but has struggled in recent years. In 2014, revenue had declined by nearly 50% from its peak, and the company posted a massive loss. Zynga was up about 4% on Tuesday, with investors no doubt wondering whether an acquisition is in the cards following Activision's deal for King.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.