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Zynga has agreed to acquire the Helsinki-based mobile game maker Small Giant Games, the creator of the hit title Empires & Puzzles. Zynga will pay $560 million in cash and stock for 80 percent of the company, and the rest will come later.
It’s the biggest deal since Zynga acquired CSR Racing maker NaturalMotion for $527 million in 2014. And it reflects the strategy of CEO Frank Gibeau to grow during an age of mobile gaming consolidation through both the creation of new games and acquisitions.
Back in May, Zynga acquired 1010 mobile game maker Gram Games for $250 million in cash plus other considerations. That was preceded by Zynga’s 2017 purchase of assets, including a casual game studio Peak Games, another Istanbul-based game studio, for $100 million.
The deal will close on January 1, pending various approvals. To put the purchase price in perspective, the amount is larger than the $494 million valuation of Cloud Imperium, which is making the Star Citizen and Squadron 42 games, which hold the record for the highest crowd-funded games in history. While Cloud Imperium has 520 employees making its triple-A games, Small Giant Games has just 47. That means Zynga is paying at least $11.9 million per Small Giant Games employee.
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“I’ll take our 47 Finns,” Gibeau said in an interview with GamesBeat. “The Finns have small teams that are very skillful. What they have accomplished with Empires & Puzzles is phenomenal.”
Zynga is buying the company because it has a hit game which has been downloaded more than 24 million times in the past 18 months and has broken into the top 10 grossing games on iOS and Android. That’s a remarkable result for the first game from Small Giant Games, which Timo Soininen cofounded in 2013. He previously the CEO of Habbo Hotel, an early hit online game.
Small Giant Games is expected to contribute to Zynga’s growth in 2019. Empires & Puzzles game successfully blends approachable match-3 battles with deeper gameplay elements including Hero Collection, Base Building and Social Alliances.
“Our studio was founded on the idea that small, skillful teams can accomplish giant things, and I am confident that partnering with Zynga is the right next step in our evolution,” said Soininen in a statement. “We will now operate as a separate studio within Zynga, maintaining our identity, culture and creative independence. By leveraging the expertise and support from the wider Zynga team, we will amplify the reach of Empires & Puzzles and the new games in our development pipeline.”
In terms of details, Zynga will acquire 80 percent of Small Giant for $560 million, made up of approximately $330 million in cash and $230 million of unregistered Zynga common stock (issued at the average closing price per share over the thirty-day trading period ended December 19, 2018). The final upfront transaction consideration will also include customary closing adjustments and will be partially funded by a newly established $200 million revolving credit facility.
Zynga will purchase the remaining 20 percent of Small Giant over the next three years at valuations based on specified profitability goals. Gibeau said that represents an “earnout,” or a way to retain the employees of Small Giant Games with the potential of a bigger payday down the road.
Small Giant Games had bookings last year of $190 million, which would put it just behind Zynga’s own Words With Friends in terms of revenue generation.
“It’s already at scale, profitable, growing, with fantastic engagement metrics,” Gibeau said. “People play it and they keep on playing. The team has great talent.”
Empires & Puzzles also gets Zynga to new users, as more of Empires & Puzzle audience is on Android and 60 percent of its revenues are outside the U.S., Gibeau said.
“From our perspective, it really checked the boxes,” he said.
Over time, Zynga will contribute its own live operations expertise and help take the game into Asia.
Separately, Zynga is raising its fourth quarter 2018 guidance based on the strong performance of holiday bold beats across its live service portfolio — in particular, Words With Friends, Merge Dragons! and CSR2. In addition, Wonka’s World of Candy is off to a promising start since its launch in early November.
This performance does not include any contributions from Small Giant yet. Small Giant Games raised $41 million in February, making it one of the rare mobile game studios to be able to raise a large round of money in a mature mobile gaming market. The Small Giants Games investors include EQT Ventures, Creandum, Spintop Ventures, and Profounders. Gibeau said they requested to be paid in Zynga stock out of confidence in Zynga’s future.
“We have hit our margins, gross revenue goals, and are fundamentals are good,” Gibeau said. “The turnaround is over and it’s all about growth. We are layering in new themes and products as opposed to just trying to fix things. It is emotionally and culturally exciting for the company.”
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