Strategy games

Contact: Scott Denne

Mobile game developers are playing with different M&A strategies. So far, none are winning. Mobile gaming is a high-growth but hits-driven business, making it tough for one company to grab and maintain market share. That doesn’t mean they’re not trying.

King Digital Entertainment, maker of the ‘Candy Crush’ series, thinks it can predict where lightning will strike. The company is making its second purchase post-IPO with its $45m reach for Z2. In acknowledgement of the uncertainties of this particular market, there’s also a $105m earnout attached to the deal. That’s similar to King’s pickup of game studio Nonstop Games last year – $16m upfront with an $84m earnout.

Zynga has taken a different approach that has yet to pay dividends. The company has bought businesses that have already produced a hit. It has, we hope, learned that predicting what will be a hit is as difficult as predicting how long a hit will last. Zynga’s M&A strategy is more expensive than King’s in that it pays more upfront, with a small or no earnout. The company spent $180m in 2012 to buy OMGPOP right at the zenith of its ‘Words with Friends’ game. Last year, it snagged NaturalMotion for $487m. In addition to a game studio, that transaction got it some unique technology to apply across its portfolio, but it hasn’t been enough to slow its fall. Despite the addition of NaturalMotion’s revenue to 11 months of last year’s top line, Zynga’s sales dropped 21% to $690m in 2014.

Glu Mobile is among the few employing a winning strategy. The company has been scooping up inexpensive, well-known brands that it can revamp for mobile games. This has led to a portfolio of modest hits. Nothing that would move the needle for Zynga or King. Even with Glu’s success (revenue doubled year over year in the most recent quarter), Wall Street values the company at 2x trailing revenue (slightly below Zynga’s multiple and just above King’s).

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