How Zynga looks for the right game companies to acquire

GamesBeat: It’s interesting how some companies like Riot can get by without ever launching new games.

Petrovic: [laughs] They’re perpetually in the works, yeah. They’re working on something. That’s the power of a franchise, though. When you have something at that level of scale, that goes back to what were some of the early tenets of the turnaround for Zynga. Reminding the company that we had all these franchises that millions of people a day were coming to. That’s hard to replicate, and getting harder. When you have a good thing, you can create just as much value, if not more, by building on top of that foundation, instead of building from scratch. Building from scratch also has high potential, if it resonates with the audience and is executed well.

That’s why something like FarmVille, which has so much brand equity, combined with a crack, top-tier team in Helsinki — there’s a lot of excitement around the potential for that. Obviously with Gram and Small Giant having demonstrated success with games and then building the next phase of their growth through these new games, there’s a lot of excitement around that, because they seem to have cracked some code. It’s hard to define what that is, except by virtue of the audiences voting with their time in those games. Doubling down on formulas that have worked and then iterating and innovating on top of those things are both super important and part of the mission of the company.

GamesBeat: You started talking a bit earlier about companies that are acquisitive or likely to acquire, and how they’re motivated by different things. I wonder what you think of the world as it is, with the M&A charts that are so dominated by Asian companies, the Chinese companies and once in a while the Israelis. What do you see as the different motivations for the acquisitions that are happening?

Petrovic: The larger these companies are, the larger swings that they can take at doing deals. There’s a stratosphere in which some of these companies exist where companies like Zynga can’t currently compete, at least when it comes to deploying that amount of capital. It doesn’t mean we can’t compete in the sphere of deals we are able to look at, and in many cases we have been fortunate enough to win out in competitive situations, presumably with strategics from Asia in the mix.

The motivations for these companies can span any of a number of things, a lot of which we’re not privy to. You can imagine that diversification, maintaining a certain level of market share, de-risking themselves from too much concentration in one location around development — any of a number of these things. For Zynga one of the pillars of the turnaround is to bring in new forever franchises through M&A. Any and all of these things could be factors for these companies. I think our peer set’s better suited to answer that on their behalf. But I can only imagine that a lot of these factors go into their thinking.

GamesBeat: One thing I worry about is, will all these companies wind up being Asian-owned at some point? Given the trend in acquisitions, it sounds like a world that still might not happen. The way the game industry has been, even if they acquire all these companies, people will just leave and start new ones wherever they are.

Petrovic: Especially as it related to China, before there was more regulation that came down from the Chinese government around exporting capital — you covered that extensively. It’s been about two years post on that, and we’ve seen — non-gaming companies that are publicly traded in China are not making game company acquisitions anywhere near the rate they were at one point. That was a big source of exit. It’s another thing when gaming companies like Tencent and NetEase and others are deploying capital, because it’s within the wheelhouse of what they do.

Companies around the world are going to make their own decisions about how they feel about working with a company from any geography, hopefully from a culture fit perspective, from a quality of life perspective, from an alignment of vision perspective. Those considerations, in my mind, transcend, in many cases, price.

GamesBeat: These things come back to helping you benefit during deal-making as well.

Petrovic: Again, we align so much on the qualitative aspects of what makes a deal successful. In many cases other acquirers don’t. It’s a matter of time before there are enough use cases of companies that come out of experiences that have not been positive, regardless of who the owner is. It’s happened everywhere, including at Zynga throughout its time.

M&A is a very tricky thing to manage, because what people don’t realize — it’s not dependent on the successful execution of the transaction. It’s dependent on the successful long-term working relationship. That’s where the value is created for both sides over time. That’s a much longer investment cycle.

I’m excited for the M&A activity in the market in general to continue. We’re in a prime spot to continue to execute on our vision, and hopefully we can continue to uncover the next Gram Games and the next Small Giant.

GamesBeat: Are more game company IPOs likely?

Petrovic: It depends on what market. We had Sciplay that went out relatively successfully. It maybe gave folks here in the U.S. a bit of renewed confidence in the public markets. Between our relative performance over the last three years and Glu’s as well, that’s also done well for the western markets.

The Nordic markets have been interesting in terms of the rule sets that allow companies to go public there. That creates a lot of increased visibility for the gaming industry, regardless of how the companies perform. It adds another layer of visibility to our industry when it’s on a public market. It’s always interesting to see how Asian companies are riding the waves, which markets – western or eastern – that they like to leverage. There was momentum many years ago around Asian companies coming west, and more recently delisting and relisting back in Asia, because of the arbitrage on multiples. Now I don’t know where that is, but I’m sure the pendulum will keep swinging.

The public markets will continue to be robust, as well as the investment markets. You look at the slew of private equity money that’s starting to come in the game industry, through Blackstone and KKR. The acquisitions they’ve made — it’s interesting to see these kinds of companies coming into the mix, that historically haven’t been in there. It speaks to the maturity level of games. It’s now barkering to a wider audience of financial investors, which is super exciting.

GamesBeat: Do you think it’s unlikely that the platform companies, the biggest ones, would start buying game companies? The likes of Amazon, Google, Facebook, Apple. Microsoft got active and then it looks like it caused Sony to buy one company. Sometimes there can be a domino effect. But do you think this is unlikely, that the large platforms would do this?

Petrovic: At one point in time I would have said very unlikely, but if you look at, to your point, Microsoft and Sony, if you look at the history of Valve, which operated on the back of its own content, and the Epic Store….

GamesBeat: These are platforms we didn’t really think about as platforms. We thought of them as game companies.

Petrovic: The Apples and Googles of the world, that would be an interesting development in our category. It would cause you to have some very busy cycles, with all the feedback loops coming in around how game companies would feel about that. [laughs] It’s going to be interesting seeing that to a limited degree with the Apple subscription and how companies in that subscription fare versus ones that aren’t. That will be somewhat of a harbinger of how that kind of curated ecosystem will work.

GamesBeat: Apple is moving into owning its movie and TV content. But I guess the inhibitor I saw was that both Google and Amazon have to be wary of anti-trust. For them to acquire companies in some new space — I think that was one of the original reasons why Google never followed through on buying Twitch, a certain fear of the government stepping in.

Petrovic: That’s one thing. Google obviously has Stadia working on its own content to a certain degree. Amazon, to their credit, has taken a lot of swings at buying companies, made a lot of bets on their side, although not in the direct anti-trust nature that you’re talking about. Even these platforms are doing it on the periphery. Apple has been one of the few — their periphery has been in other media verticals, to your point. It’s going to be interesting to see how that manifests itself with games.

Somehow, media and entertainment platforms have historically thought of games as a bridge too far. Even with the media companies ebbing and flowing in and out of game development. It’s entertainment content creation, but they’ve seen it as a different beast from music or TV or movies, which has been interesting. I don’t know what to ascribe that to, why it’s exponentially harder for them to do that form of entertainment versus others. To me it’s all entertainment. The only difference is you’re pressing a button that makes the action move forward.

Disclosure: The organizers of GameDaily Connect paid my way to Anaheim. Our coverage remains objective.