Was Acquiring OMGPOP A Smart Move For Zynga?

April 5th, 2012 by Trefis Team
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Zynga (NASDAQ:ZNGA) has made a lot of acquisitions in the last couple of years in order to maintain its rapid growth. However, it made its biggest acquisition to date – OMGPOP, the maker of the top mobile app, Draw Something – in March, acquiring it for more than $210 million. Draw Something was the fastest growing game to date in terms of users. It quickly overtook Zynga’s top 5 games – Words with Friends, CityVille, Texas HoldEm Poker, CastleVille and Hidden Chronicles to claim the top spot in terms of daily active users, which is one of the best metrics to measure engagement.

Check out our complete analysis of Zynga

Zynga May Have Overpaid for OMGPOP

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Draw Something even passed 50 million downloads this week and continues to be one of the most popular games in the App Store. Acquiring OMGPOP also gives Zynga the ability to cross promote its other games to users of Draw Something, giving it greater reach in the mobile gaming market, which it is trying to dominate as it focuses on alternatives to the online social gaming space to drive additional revenue.

However, Zynga may have bought Draw Something right before it peaked begging the question of whether it overpaid. Even though it is still the number one app in terms of daily active users on AppData, and one of the top paid games on the App Store, its growth curve in terms of daily active users has almost flattened and it has dropped from the top spot on the App Store. [1]

Since its most popular games and apps are quickly drowned out in the hyper-competitive mobile gaming market, there is a good chance that Draw Something will soon be overtaken by another mobile game and see a slow decline in user engagement levels.

Ultimately, whether or not it was a good acquisition for Zynga boils down to how effectively Zynga is able to leverage its existing user base to drive usage of its other games. Assuming that part of the reason behind the quick acquisition was to quickly hire additional mobile gaming talent, Zynga could also leverage the OMGPOP team to try and build the next big hit, but given the very low probability of hitting the jackpot again, Zynga may very well have overpaid for OMGPOP.

Zynga is the world’s largest social gaming company, with more than 240 monthly million active users. It competes primarily with other social gaming companies like Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios. Zynga has recently started focusing on the mobile gaming space, which is set to explode as smartphone shipments reach record highs in the coming years.

We currently have a $13 Trefis price estimate for Zynga, which stands nearly 4% above its current market price.

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Notes:
  1. Did Zynga Buy OMGPOP Literally the Day It Peaked?, Forbes [↩]