The New York Times inserted two juicy pieces of information in a lengthy piece on Zynga’s demanding, data-driven culture yesterday. The paper said the company lost the chance to acquire PopCap Games at $950 million in cash and Rovio Mobile at $2.25 billion in cash and stock because of its ruthlessly competitive culture.
The whole story isn’t surprising to anyone in this industry, as Zynga’s culture is what made the company what it is today — a four-year-old business that’s on track to make more than $1.1 billion this year in revenue. The Times is basically playing catch-up to The Wall Street Journal, after its account earlier this month about Zynga clawing back unvested options from underperforming employees.
However, the pieces about PopCap and Rovio are new, as Zynga’s biggest publicly disclosed acquisition to date was $53.3 million in cash and stock for Words With Friends-maker Newtoy. Either deal would’ve represented a significant shift for the company. Here’s a bit more context:
We can confirm that PopCap did have a competing offer from Zynga against EA. And while we can’t corroborate that it was $950 million in cash as the Times reported, we can understand why the Seattle-based company chose EA over its rival. PopCap Games was a company that raised funding late in life. It took $22.5 million in funding in 2009 after it had already been around for nine years. So the founders were not that diluted and could still control their own destiny.
PopCap also has a very special, quirky culture. It has popular franchises like Bejeweled Blitz and Plants Vs. Zombies that it nurtures over many years. But it also gives its employees creative freedom through projects like its indie label Fourth and Battery. Fourth and Battery makes games about unicorns getting slaughtered by circular saws. A PopCap team also worked with a nine-year-old boy who had leukemia to fulfill his lifelong dream of building a space-themed tower defense game.
It’s not clear how such a culture would thrive in Zynga’s environment.
The second piece of information is bizarre as a $2.25 billion offer for Rovio Mobile would be more than twenty times what we understand is an annualized revenue runrate of just over $100 million, according to two sources familiar with the company’s earnings. We also reported last month that Rovio’s talks with strategic acquirers hadn’t moved forward at a price point of just over $1 billion.
Rovio has a history of making very aggressive demands about its valuation. Before it raised $42 million in a secondary round led by Atomico Ventures and Accel Partners in March, it shopped itself at a price of roughly $250 million, according to a source familiar with the discussions. We would suspect that the Times’ sources were on Rovio’s side and may be manipulating the paper to pump up its valuation via strategic leaks to the press.
A second possibility is that there were loose, informal talks at that number with the intention of bringing the valuation down through further negotiation — a strategy Zynga has employed in the past.
One other source who has been through the Zynga acquisition process said the company generally does two things:
1) The company will put out an initial term sheet, and then lower their offer once they understand more about the business.
2) Then they study the company’s roadmap and figure out who the key people are, so they can recruit them if the deal falls apart.
Other sources familiar with Zynga’s acquisition strategy are much more cynical about the second point, saying that in its early years, Zynga cultivated a reputation as a company that would engage in talks to acquire competitive intelligence. It would then turn around and use that information to either poach a target’s most talented employees or copy their games.
Whether Zynga does this intentionally or not is a point of debate.
For example, we understand that Sequoia Capital-backed Pocket Gems and Zynga had engaged in talks in the earlier part of this year before Apple cracked down on incentivized installs, crimping profit margins for the whole industry. Zynga has now come out with a directly competitive title called Dream Zoo, produced at a lower expense than what a full-scale acquisition would’ve cost.