Why Didn’t Zynga’s Billion-Dollar Offer for PopCap Win?

As the Web’s hottest games company, Zynga was one of the most aggressive bidders for PopCap over the past couple of weeks, according to many sources close to the situation.

So, why didn’t it win the hit-driven games company?

That’s a very good question.

Yesterday, Electronic Arts announced it purchased PopCap for $650 million in cash and $100 million in stock. The deal could soar to as much as $1.3 billion if PopCap hits some very aggressive revenue goals.

But, according to one source, Zynga’s offer exceeded that, and was worth $1 billion in cash. Another source added that EA’s offer only appeared greater because more cash was delivered upfront, although both bids were similar in nature over the long term.

A Zynga spokeswoman — as the company usually does on even the most minor and mundane of queries — declined to comment about its involvement in the PopCap bidding.

But, as of March 2011, according to documents it filed related to its IPO, Zynga had nearly $1 billion in cash and is expected to raise up to $1 billion in its public offering.

With all that money, as well as its own stock, Zynga clearly could have come up with sufficient funds to purchase PopCap, which is known for such games as Bejeweled, Plants vs. Zombies and Peggle.

And, bidding that much seems to make some sense, too.

That’s because PopCap would have given Zynga the scale and scope that it is looking for on other platforms, as well as a strong revenue stream, profits, a dominant headquarters in Seattle, which it has been looking for, and even a position in Asia, where Zynga has struggled and PopCap has been doing well.

More importantly, as it seeks an IPO, one of Zynga’s biggest risk factors is its dependence on Facebook, which takes a 30 percent cut of its revenues.

PopCap would have given Zynga some of the distribution diversity it needs, with its games installed and played more than 150 million times on a diverse range of non-Facebook platforms, including RenRen, Google, iPhone, iPad and Android. In 2010, about 80 percent of PopCap’s revenues came from these platforms.

It is no wonder, then, that Zynga was interested. The bidding represented its most ambitious yet, sources said.

In fact, the failure of Zynga to purchase PopCap calls into question why the San Francisco company, which is the darling of Wall Street and the largest social games company, has only scooped up small studios around the world and hasn’t land something as prominent as PopCap.

Just five days ago, in fact, Zynga announced the acquisition of the Toronto-based Five Mobile, which was its 15th acquisition in 13 months. Terms of the deal were not disclosed, including the size of the team.

But, like most of its other purchases, it was relatively small.

While Zynga would not talk about that, both EA’s CEO John Riccitiello and PopCap’s CEO Dave Roberts were willing to say that the bidding process was competitive.

Roberts said it was “a fully competitive process that took me by surprise.”

Riccitiello said in recent months PopCap has received bids from other game companies.

“Ultimately, PopCap chose EA. Their leadership team tells us that in the end, the decision swung on their recognition of our culture — the respect that EA shows for games and the teams that create them,” he wrote in a letter to employees.

One source said that there were several offers, some verbal and some via multiple written offers.

But, in the end, EA won, which one source describes as “a game-changer for EA.”

Ricitiello agreed. He told me that in a matter of months that he expects PopCap and EA’s combined traffic on Facebook to hit 20 million monthly users.

While that’s very far from Zynga’s dominant position, he said he wants to get EA within “punching distance.”

It’s still a reach, even with PopCap. That’s why to get to jab at Zynga, Riccitiello was willing to commit more than an eighth of the company’s market cap toward the deal.

So far, Wall Street has reacted negatively to the news. EA’s stock dropped 22 cents after the deal was announced in after-hours trading to close at $24.17. Today, it is now trading at around $23.48 a share.

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