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Bidding war likely led to 'eyebrow raising' Omgpop price - analyst
Bidding war likely led to 'eyebrow raising' Omgpop price - analyst
March 22, 2012 | By Kris Graft

Almost as if on cue, less than a week after Omgpop's Pictionary-inspired Draw Something topped Facebook charts, and continued its mobile game success, social game juggernaut Zynga swooped in and bought the developer.

Zynga's strategy of expansion through acquisition wasn't particularly surprising, but the reported price -- $180 million plus $30 million in retention payments -- was enough to make some people spit up their coffee.

"A reported $200 [million-plus] price tag for a six-week old game will justifiably raise eyebrows," said Macquarie analyst Ben Schachter in a note Thursday. Zynga has not publicly revealed acquisition price of the New York based game developer.

"Clearly, Zynga believes that this is a unique evergreen-type game that can become a long-term growth franchise. They are also focused on the cross-marketing potential between Draw Something and Zynga's players.

"Our initial reaction is that a bidding war likely led to too high of a price for the developer, but we really won't know if that price was justified for some time," he said. Schachter did not speculate on who other potential bidders might have been.

Draw Something is Omgpop's first hit game (out of over 30 previous online and mobile releases), and it has been downloaded 35 million times, boasting 12 million daily active users, according to management. Nowadays, the game's DAUs are higher than Zynga's popular Words with Friends, a game that became part of the company after Zynga bought its developer Newtoy for $53 million in 2010.

Schachter, who maintains a neutral rating on Zynga stock with a $10 12-month price target, added that he is concerned about Zynga being a "single-platform company," due to its reliance on Facebook.

And Schacter notes that Draw Something could be met with some stiff competition from Angry Birds Space, the latest version of Rovio's perennially best-selling series.

Analyst Colin Sebastian with Baird Equity Research in a separate note said the reported acquisition price "seems consistent with revenue multiples Zynga paid for other developers," and raised Zynga's share price target to $14 from $13.

"In addition to being highly engaging, the game is likely monetizing well, through a combination of download fees, in-app transactions and advertising," he said. "Importantly, by leveraging Zynga’s platform and user base, we expect Draw Something and possibly other Omgpop titles to show strong growth."

Zynga's stock was up about 2 percent this morning to $14 on the Nasdaq.

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