Opinion: Why Zynga's $210 million acquisition of OMGPOP's is the right deal at the right price

Running the PG.biz slide rule over the numbers

Opinion: Why Zynga's $210 million acquisition of OMGPOP's is the right deal at the right price
Although the price has yet to be officially announced, there's been much speculation about whether Zynga (NASDAQ: ZNGA) paid too much or too little for Draw Something developer OMGPOP.

The consensus is that the studio sold for $180 million, with an additional $30 million based on future performance.

It's not clear how Zynga will pay for the acquisition, although with over $2 billion in terms of total assets - of which around $1.8 billion are cash or liquid securities - it's likely to be mainly cash.

Write the cheque

In terms of what Zynga gets, OMGPOP is a 40-strong developer based in New York, which had raised $16.6 million in terms of venture capital.

It hasn't released any financial figures, but as with most VC-funded companies, OMGPOP was likely loss-making in terms of the total sales it had generated minus that $16.6 million capital.

But with Draw Something downloaded over 35 million times in six weeks, and with one billion drawings sketched last week alone, the game's enormous audience would certainly have made it a profitable company during 2012.

It's been suggested that as the #1 word game on the Apple App Store in 84 countries, Draw Something would be generating around $250,000 daily, meaning OMGPOP would have generated $16.6 million back in 68 days.

Paid too much?

The issue for people who think Zynga has overpaid is that Draw Something was only released in February 2012, so there's no track record of how active users will be over the coming months and years.

It's this that makes the valuation of a company such as OMGPOP so difficult to calculate. Typical accounting rule-of-thumb calculations such as 2-3 times annual earnings or 5-10 times annual profits just don't make sense.

One way of looking at the issue is to consider the game's user base.

In terms of user acquisition, it's generally reckoned that in the US, it costs around $2 to get a new user for a free-to-play Facebook or mobile game.

Given the game's current stated daily active user base is around 12-13 million (across Facebook and mobile), Zynga should have paid around $25 million.

(OMGPOP also has around 20 million registered Facebook users but we're ignoring them as worthless, compared to Zynga's 240 million monthly active users on the platform.)

In terms of pure maths then, Zynga's paid around $16-$17 per user.

Of course, this calculation ignores the $250,000 of daily revenue OMGPOP is making, which if it were to be steadily maintained over the year, would be over $50 million in terms of pure cashflow.

That's clearly worth spending $210 million on.

Goldilocks deal

In this way, given the uncertainties about OMGPOP's long term business - and even assuming it doesn't have another hit game - the consensus is that Zynga probably paid about the right amount.

For example, Giordano Contestible, PopCap's franchise business director for Bejeweled, tweeted that Zynga had "bought 13M FB connected DAU at market value".

He also pointed out that combining the Draw Something audience with Zynga's existing Words With games made it "an asynchronous turn-based gaming powerhouse".

And, if nothing else, doing the deal so quickly stopped any other rivals snapping up the company, neatly combining an aggressive expansion play with a defensive move.

Zynga can cross promote its existing games to Draw Something's players, creating additional synergies, as well as bulking out its own Zynga Platform.

Too cheap?

Yet, some industry commentators reckon Zynga bought OMGPOP at a knockdown price.

Reported by Business Insider, Simon Khalaf, who knows a thing or two about numbers as CEO of mobile analytics company Flurry, commented "OMGPop sold way too early. They're leaving $800 million on the table."

His view is that the growth of Draw Something is so fast, it had the opportunity to become the next Rovio.

That seems to be an extreme view, though, given that it's based on six weeks of user data.

Buyer's market

Aside from anyone else's view on the company's valuation, it should also be pointed out that the people with the best information and the most to win (or lose) were OMGPOP's investors, including the likes of Spark Capital, Bessemer Ventures Partners and Baseline Ventures.

Given they had put $17 million into a company that looked like it was going bust a couple of months ago, they might have been expected to take any reasonable offer.

And perhaps that's the best clue that Zynga's executives will be patting themselves on the back in 12 months time on a great deal smartly done.

After all, its $53.3 million deal for Words With Friends' developer Newtoy in December 2010 seemed expensive at the time. The game doubled its userbase in six months becoming the core of Zynga's mobile business.

Contrast that with the $403 million DeNA spent on US free-to-play publisher and platform company ngmoco; incidentally a deal that it was rumoured (a pre-IPO) Zynga turned down because it was too expensive.   

A final note. At time of writing, Zynga's share price was up 2.5 percent on news of the deal to $13.72.

Contributing Editor

A Pocket Gamer co-founder, Jon is Contributing Editor at PG.biz which means he acts like a slightly confused uncle who's forgotten where he's left his glasses. As well as letters and cameras, he likes imaginary numbers and legumes.