Zynga buys beyond Facebook

Contact: Jarrett Streebin

Zynga has become a serious collector of small to medium-sized game development studios, acquiring seven companies so far this year. Beyond just buying more titles, the company has used M&A to get into other markets. For instance, Zynga has expanded internationally with XPD Media in China, Dextrose in Germany and Unoh in Japan. With the latest purchase of Bonfire Studios, which was announced October 5, it goes beyond Facebook gaming altogether into console and PC gaming.

Founded in 2007, Zynga has grown from a small social games developer into the largest shop on the block. The San Francisco-based firm is the leading developer of Facebook games and makes its money by selling virtual goods in its games. (We looked more fully at the market for virtual goods in a recent Sector IQ.) Users can pay real cash to buy weapons for their mafia or crops for their farms. Things were going well until Facebook unveiled Facebook Credits earlier this year. There was even a standoff between Zynga and Facebook due to the 30% cut that Facebook takes. Eventually, Zynga gave in and signed an exclusivity agreement.

Still, we sense that the company learned a valuable lesson about being overly dependent on a platform that it doesn’t own. At least that’s how we might read the fact that six of Zynga’s past seven deals are in other areas of gaming. The diversification has seen Zynga broaden its international business with the acquisitions of Chinese firm XPD Media, German game engine developer Dextrose and Japanese social gaming company Unoh. And most recently, Zynga’s reach for Bonfire Studios added a startup that was founded by three gaming veterans with PC and console experience.

EA’s South Korean embrace

-Contact Thomas Rasmussen

Even as business at home deteriorates sharply for US-based videogame giant Electronic Arts, it has been quietly – but quickly – using acquisitions to build up its presence in South Korea, a country that has some of the highest broadband penetration rates in the world. In the past year EA has gone from a mere sales presence in Korea to a significant developer and marketing operation, adding about 50 employees there. It has done this by two acquisitions in the past six months. In May the company purchased Hands-On Mobile Korea for $30m to shore up its mobile and casual gaming business. And this month it added J2MSoft, a company with some 55 developers, for an estimated $30m.

If the pickup of J2MSoft represented simply an EA land-grab in a relatively small market, the story would end here. But beyond simple geographic expansion, the purchase indicates a strategy to focus on a quickly growing part of the industry: online gaming. The region is known for these offerings. J2MSoft, for instance, has already launched three successful online games in Asia. We recently profiled the growing interest in casual gaming as a viable business. But the shift to online is just as big, if not bigger.

EA certainly wouldn’t have missed the blockbuster success of the online division at rival Activision Blizzard. That company attributed more than 40% of its $649m revenue in the third quarter to this phenomenon. That was driven by its online game World of Warcraft, which single-handedly took in as much money as all of its properties across the four major videogame consoles. In addition, World of Warcraft‘s subscription-based model has generated billions for Vivendi (which owned Blizzard when it merged with Activision) since it launched four years ago. Along with casual gaming companies, we suspect shopping of online gaming companies will continue to dominate gaming M&A well into 2009.

Select shopping of online gaming companies

Date Acquirer Target Deal value
December 9, 2008 Atari [Infogrames Entertainment] Cryptic Studios $27.6m
December 8, 2008 Perfect World Global InterServ China $23m
August 1, 2007 Walt Disney Club Penguin $350m
October 11, 2007 Electronic Arts VG Holding $620m
June 20, 2006 Electronic Arts Mythic Entertainment $76m

Source: The 451 M&A KnowledgeBase