Disappointing run forces Zynga to make its biggest purchase yet, shares pop

The creator of Farmville and Words With Friends, Zynga Inc (ZNGA), has had a tough run in the stock market ever since it went public seven years ago. The stock has been strictly trading sideways as the company continues to struggle making profits. In 2017, the company posted a modest annual profit after at least five years of running in losses.

Zynga has been trying to turn the table around by focusing more on the mobile platform under the leadership of CEO Frank Gibeau. And it made a big move late on Thursday in this regard when it announced that it was acquiring Finland-based company Small Giant Games in its biggest purchase to date.

Zynga will buy the creator of popular RPG game Empires and Puzzles in a deal valued at around $700 million. The initial purchase will be an 80% stake in the company for $560 million. Rest of the purchase will be made based on certain conditions of profit targets over the next three years.

ZNGA shares were trading up 6.4% during pre-market trading on Friday. The stock is down 10.6% in the trailing 12 months.

The transaction, which will be partly funded by a $200-million credit facility, will be composed of $230 million of Zynga stock as well as $330 million in cash. Both the gaming firms expect to close the deal by New Year.

CEO Gibeau said in a statement, “We’ve been impressed by the quality and momentum of Empires & Puzzles as we add another Forever Franchise into Zynga’s portfolio. Small Giant has created an innovative game that delivers a unique player experience that engages over the long term. We are excited that Small Giant is joining Zynga as they enhance our next phase of growth.”

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The Small Giant deal tops Zynga’s 2014-purchase of UK-based developer Natural Motion for $527 million.

In the same release, Zynga raised its revenue guidance for the fourth quarter, crediting the popularity of Words With Friends, Merge Dragons! and CSR2 during the holiday season. Q4 revenue expectation was raised from $235 million to $243 million, while net loss outlook was slashed from $2 million to $1.5 million.

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