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Why Grand Theft Auto maker Take-Two is buying Zynga for $12.7 billion

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Wall Street sees the rationale behind Take-Two’s $12.7 billion deal to buy Zynga, even if traders hate the transaction at first blush.

“Take-Two is using its balance sheet and equity to opportunistically buy a good mobile asset in a depressed market,” said Jefferies analyst Andrew Uerkwitz. 

The Grand Theft Automaker said it would pay a 64% premium to scoop up Words With Friends developer Zynga, using a mix of cash and stock. Zynga will continue to be led by CEO Frank Gibeau, get two seats on Take-Two’s board and operate as a standalone label inside the company. 

The combined company is expected to boast 8,000 game developers. 

Take-Two shares dropped 15% on concerns it would be lured into a bidding war for Zynga/and or is overpaying for the game developer. Shares of Zynga soared nearly 45% to $8.61, below the offer price from Take Two of $9.86. Gaming rivals Electronic Arts and Activision Blizzard saw their shares decline slightly. 

“We believe there is tremendous value in Zynga and wouldn’t be surprised if there are over-the-top bids,” added Uerkwitz.

FILE – A pedestrian walks in front of a sign at Zynga in San Francisco, Tuesday, March 16, 2021. Take-Two Interactive, maker of Grand Theft Auto and Red Dead Redemption, is buying Zynga, maker of FarmVille and Words With Friends, in a cash-and-stock deal with an enterprise value of about $12.7 billion. Take-Two said Monday, Jan. 10, 2022, it anticipates $100 million in annual cost savings. (AP Photo/Jeff Chiu, File)

The transaction comes as Zynga shares plunged 40% in the year leading up to the deal being disclosed, reflecting concern on the Street about post-pandemic mobile gaming demand and the company’s development pipeline. Valuations on Zynga were hovering around five-year lows. 

Take-Two’s long-time CEO Strauss Zelnick told an analysts on a call he sees several opportunities to drive synergies from the tie-up. 

One is to bring Take-Two’s top franchises such as Grand Theft Auto more aggressively to mobile platforms. Another upshot is the ability to move faster into emerging markets with free-to-play mobile games. And lastly, the company sees $100 million in annual cost savings from the deal that could be reinvested or brought right to the bottom line. 

Added Uerkwitz, “The acquisition significantly increases TakeTwo’s exposure to mobile (currently ~10% of revenue). More important, there is a change in management tone toward focusing on mobile for its core franchises by leveraging Zynga’s expertise.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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