Check out the on-demand sessions from the Low-Code/No-Code Summit to learn how to successfully innovate and achieve efficiency by upskilling and scaling citizen developers. Watch now.
But given that most acquisitions fail, it was also a huge risk for both sides. How can one company buy another without quashing the culture and creativity that made it a success?
I discussed this subject recently with Zynga COO Matt Bromberg and Timo Soininen, a cofounder and CEO of Small Giant Games, onstage at the recent Slush technology conference in Helsinki, Finland.
Small Giant Games struck gold with Empires & Puzzles. After launching the game in 2017, the company raised raised $41 million in February 2018. One year ago, Zynga announced it was acquiring 80% of Small Giant Games for $560 million, with the rest to be purchased in the coming years based on performance.
GamesBeat Summit: Into the Metaverse 3
Join the GamesBeat community online, February 1-2, to examine the findings and emerging trends within the metaverse.
But as much as the deal validated Small Giant Games, it also marked the last confirmation of Zynga’s comeback. After going public in 2011, Zynga fizzled out and seemed to be in a deadly tailspin. But Frank Gibeau, a former Electronic Arts executive, righted the ship after becoming CEO in 2016, getting it back to breakeven and growing again.
That growth included acquisitions. Bromberg said that buying other companies was only possible after Zynga got its own house in order.
“When I joined the company, a little more than three years ago, the company was essentially worthless in the stock market. Which is to say the stock was worth about as much as the cash we had,” Bromberg said. “Buying companies was not the first thing we thought about it. In general, it’s a terrible idea to try to fix your own problems by buying another company. No great company would want to be a part of your company if you’ve got a lot of problems yourself.”
As Empires & Puzzles continued to soar, Small Giant Games began getting calls from companies feeling them out about potential acquisitions. “We started getting inbound interest from various players and it was tempting because we had gone through hell and come back,” Soininen said. “We almost ran out of money at one point.”
The Finnish startup raised its VC round in 2018 in part to take some of the pressure to sell off the founders. That allowed some insiders to sell some stock and weigh their options. From the Zynga side, Bromberg said the courtship lasted 18 months, and began as broader, introductory conversations to get to know people on both sides.
He was also aware that there was big interest in competitors who were making their own overtures.
“We actually had someone sit in the coffee shop outside across the street from their offices and watch the door to see who was coming out, and figure out who else was coming in,” Bromberg said.
In pursuing such a deal, Bromberg said players often get up in winning and closing a transaction, rather than thinking long term about the implications. And that’s a big reason most acquisitions eventually get labeled as failures.
“You want to win the right way and you want to win for the right reasons,” Bromberg said. “And that’s the mistake that a lot of companies make when they get into the game of the transaction and imagine that the transaction is the point of the whole thing. In fact, the point is the next three years, five years. It’s not getting to the finish line of the transaction.”
That impulse led ultimately to the structuring of the deal, with Zynga buying 80% and then the rest if Small Giant Games met certain benchmarks over the next three years. Both sides felt the deal reflected their belief in the other.
“Most companies don’t think really hard about authentically wanting other people to be successful, and how they can do that,” Bromberg said. “And it turns out that for us, that’s a real differentiator in the market. It sounds stupid. It sounds like not something that should be a differentiator. But actually caring about other people and doing what you say and being reliable and being transparent and just trying to be a decent person turns out to be a big market differentiator.”
Added Soininen about the deal structure: “That was really important for us because we were just getting started and we knew that a lot of the value will be coming through over the next 2, 3, 4, or five years. That really keeps us going. We are 100% entrepreneurs and that’s a very clear mechanic for us.”
By accepting an offer from a smaller player like Zynga, versus say a goliath, Soininen also felt he could make a bigger impact on the new parent company rather than just being an insignificant rounding error on someone’s balance sheet.
“It wasn’t just us selflessly trying to optimize our own thing, but to optimize for the greater good,” He said. “Which actually turned out to be a great sort of value kicker for us.”
Overall, the past year since the acquisition has certainly been another good one for Zynga. It’s stock has almost doubled. And it’s third quarter revenue of $345 million was up from $248 million for the same period a year ago.
GamesBeat's creed when covering the game industry is "where passion meets business." What does this mean? We want to tell you how the news matters to you -- not just as a decision-maker at a game studio, but also as a fan of games. Whether you read our articles, listen to our podcasts, or watch our videos, GamesBeat will help you learn about the industry and enjoy engaging with it. Discover our Briefings.