HOT AIR BALLOON FLIGHT

By Julia Horowitz • Tuesday, January 11

Good morning. In today's newsletter: What the biggest gaming deal on record says about the state of the industry. Plus, Jerome Powell pledges to fight inflation in his second term as chair of the Federal Reserve, and Abercrombie and Lululemon send a warning for earnings season.

 

US stock futures are up slightly after the Nasdaq Composite finished a hair higher on Monday. Markets in Europe gained in early trading, while stocks in Asia were mixed.

 

▸ Forwarded this newsletter? Want global markets news and analysis from CNN Business reporters every morning? You can sign up here.

DEAL MONITOR

Why the maker of FarmVille is worth $12.7 billion

 

The company behind Grand Theft Auto is ponying up a lot of money to buy Zynga, the mobile game developer best known for hits like FarmVille and Words With Friends.

 

What's happening: Take-Two Interactive announced a cash-and-stock deal valued at $12.7 billion on Monday — the biggest gaming deal on record, according to Refinitiv. The news sent shares of Zynga surging almost 41%, while Take-Two's stock dropped 13%.

 

Take-Two's plunge signals a fear among investors that the company is overpaying. The deal values Zynga at $9.86 a share. Even after Monday's massive jump, Zynga closed at just $8.44 apiece.

 

What does Take-Two see? For starters, the deal is a huge opportunity to expand the company's presence in smartphone games, which CEO Strauss Zelnick noted is "the fastest growing segment of the interactive entertainment industry."

 

More than half of the combined business would come from mobile gaming, he said on a call with analysts.

 

"Despite the potential for overpaying, we like the move strategically," Neil Macker, senior equity analyst at Morningstar, said in a note to clients.

 

He noted that Take-Two is interested in creating mobile versions of existing franchises, which also include NBA 2K and Red Dead Redemption. Take-Two would also gain more exposure to that side of the industry through new titles Zynga is developing. Competitor EA notched a more than $2 billion deal for Glu Mobile, which makes "Kim Kardashian: Hollywood," last year.

 

Scale is another factor. Zelnick said that the newly combined company would have more than 1 billion users. Macker noted that focusing on mobile games could also help Take-Two expand globally.

 

Right now, the majority of its sales are made in the United States, with "a sizable portion of the remainder coming from Western Europe," Macker said. But mobile games are super popular in countries like India, where owning a smartphone is more common than having a console or gaming PC.

 

"While these games have relatively low per person revenue, the massive scale of the player base helps to generate substantial revenue," Macker said.

 

Step back: The gaming sector experienced a massive boom during the pandemic as people flocked to stay-at-home entertainment. In the third quarter of 2021, consumer spending on video gaming in the United States hit $13.3 billion, the highest on record for the period and a 7% increase over 2020, according to NPD Group.

 

Now, companies are looking for ways to keep users engaged and continue expanding, leading to a raft of industry deals over the past year. 

 

Drake Star Partners tallied 228 tie-ups worth almost $32 billion that were announced or closed during the first nine months of 2021. Other companies in the sector — like Roblox and South Korea's Krafton — have been rushing to raise money from public investors.

 

More deals could be on the way, especially as companies look to take advantage of a push into augmented and virtual reality known as the "metaverse," and as big tech companies get more involved.

 

Take-Two's Zelnick did not call out the metaverse when speaking to analysts. But he told the Wall Street Journal he sees opportunities to capitalize on the popularity of non-fungible tokens, or NFTs, which allow users to buy, sell and trade outfits or weapons for online avatars.

VOICES

Regulators could halt Trump's SPAC bid

"There is a huge risk the SEC will shut it down."

 

THOMAS GORMAN, DORSEY & WHITNEY PARTNER

 

Read more from CNN Business.

EYE ON WASHINGTON

Jerome Powell pledges to fight inflation in second term

Federal Reserve Chairman Jerome Powell is vowing not to allow inflation to become embedded in the American economy.

 

The latest: The head of the US central bank will sit for his confirmation hearing before the Senate Banking Committee on Tuesday. In prepared remarks, he pledged to fight price increases aggressively if he's green-lit for another four-year term.

 

"We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation," Powell said.

 

He said the Fed will use its tools "to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched."

 

Prices have been anything but stable recently. Consumer prices rose by 6.8% in November from the year before, the fastest pace in 39 years. The December inflation report, due Wednesday, is expected to show price gains accelerated further last month.

 

Powell said that the Fed, Congress and the American people successfully avoided a "full-scale depression" when the pandemic erupted in March 2020.

 

"Today the economy is expanding at its fastest pace in many years, and the labor market is strong," he said.

 

Members of Congress from both parties agree. But Powell still faces criticism from lawmakers like Sen. Elizabeth Warren, who thinks he has been too soft on Wall Street, making him a "dangerous man" for the role.

 

He's also had to answer for a scandal involving trading by senior members of the Fed around the time the central bank was announcing major policy shifts tied to Covid-19. 

 

On Monday, Vice Chair Richard Clarida — Powell's second-in-command — said he would resign roughly two weeks before the end of his term. The announcement came after reports that Clarida corrected a previous financial disclosure late last month to show he sold a stock fund and then quickly repurchased it shortly before the Fed announced its raft of emergency measures.

UP NEXT

Powell's confirmation hearing before the Senate Banking Committee kicks off at 10 a.m. ET.

 

Coming tomorrow: US consumer inflation for December. Economists surveyed by Reuters expect to learn that prices increased 7% over the previous year.

WHAT WE'RE READING AND WATCHING

▸ China's real estate sector is having a rocky 2022 (CNN Business)
▸ Tilray posts surprise profit, sending its stock soaring (Reuters)
▸ Gold struggles to attract investors as rates rise (FT)
▸ The private sector's grip on space travel is tightening (CNN Business)
▸ Car-sharing marketplace Turo files for Wall Street debut (WSJ)
▸ Traders bet four Fed hikes may just be the start (Bloomberg)

FINAL WORD

Abercrombie and Lululemon's earnings season warning

As companies begin to report results from their holiday quarters, there will be lots of attention on whether the Omicron variant and ongoing supply chain problems put a dent in huge levels of demand.

 

There are signs it did, if early dispatches are any indication.

 

On the radar: Shares of Lululemon fell almost 2% on Monday after the athletic clothing company said that it now expects revenue and profits for its current quarter, which runs from November to January, to be on the low end of its projected range.

 

"We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations," CEO Calvin McDonald said in a statement.

 

That's not all: Abercrombie & Fitch said Monday that while it kicked off the holiday period "strong," difficulty getting products to stores due to "extended port and transportation delays" became a serious issue.

 

"We did not have enough inventory to keep pace with customer demand, resulting in lost sales during the peak holiday selling period," CEO Fran Horowitz said.

 

Investors aren't balking, however. Shares of Abercrombie are up 5% in premarket trading on Tuesday.