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Opinion: Is Zynga ready to throw in the towel on Wall St?
Opinion: Is Zynga ready to throw in the towel on Wall St? Exclusive
October 16, 2012 | By Chris Morris

October 16, 2012 | By Chris Morris
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    9 comments
More: Console/PC, Business/Marketing, Exclusive



Mark Pincus has never been someone who follows the same path as the rest of the video game industry, but his latest divergence is a particularly interesting one.

A little over a week ago, Zynga CEO Pincus retweeted an analysis piece suggesting the company should abandon its efforts as a publicly traded entity and consider going private. The suggestion comes less than a year after Zynga's highly publicized IPO.

While there's certainly nothing controversial about a retweet, it's a curious move from the high profile CEO of a company that is, to put it kindly, floundering – and it's one some observers and investors could read as a hint about future moves.

Could Zynga be mulling that option? It's impossible to say, but it certainly raises some interesting questions. Specifically, what benefits would such a move have – and what penalties?

Let's look at those in reverse order.

Certainly, reversing the decision to take Zynga public would be a public relations disaster. It would be tantamount to admitting that the company is unable to compete in the public space and could cause fundamental damage to the company's reputation (which could hurt its chances of luring corporate partners).

Of course, Zynga is the eye of the hurricane when it comes to PR disasters these days. Executives are jumping ship faster than people can keep track. Users are leaving at an even faster rate. And, because of that, its earnings continue to shrink.

Going private so quickly would also almost certainly open the floodgates for a series of lawsuits from investors, who would feel scammed.

Advantages? Those seem few and far between. The story Pincus pointed to notes that the opportunities available to Zynga are too risky for a public company, especially since the social and mobile spaces have so much unexplored territory. Perhaps, but investors realized they were, in some ways, investing in the Wild West when they signed on board (or, at least, they should have). It was never going to be a smooth ride to easy street.

Largely, it seems that the chief argument for a once-again-private Zynga would be that Pincus no longer has to deal with the angry mobs that have seen their investments all-but-disappear.

Pincus (and Zynga) have always seemed to have a limited amount of respect for investors in the publicly traded space. The IPO didn't give shareholders a majority vote in the company's operations (Pincus retained those). And Pincus has continued to run the company in much the same way as he did in its early days – with the power concentrated around him.

Zynga, frankly, is in something of a no-win situation right now and it's going to be hard to find a way out. Analysts note the company's games business is essentially without any value – with the stock trading below the per-share value of the company's cash, securities and real estate assets.

And, while he's certainly a competitive person, some recent actions have raised questions about Pincus' level of interest in saving the company.

Despite the troubles of the last few months, Zynga has not given any indication it plans to buy back a limited percentage of shares (a common move to signal to investors it thinks the company is undervalued). For that matter, Pincus himself hasn't shown an inclination to buy back any shares personally (maybe that recent purchase of a $16 million, 11,500 square foot home has his funds tied up).

Zynga also hasn't made an honest assessment of its own expenses and course-corrected internally (many observers have pointed out the company is staff-heavy, given its operations). At the same time, it needs to find a way to stop the bleed of key talent (like the loss of Words With Friends creators Paul and David Bettner).

Despite all the problems, Zynga does still have a significant cash warchest – enough that it could afford to repurchase all outstanding shares and, in fact, take the company private. But with revenues drying up and no turnaround on the immediate (or even mid-term) horizon, that would be an incredibly risky move, one that leaves the company vulnerable to a complete collapse.

And while Pincus would surely like to get the investor and analytical communities to quit second-guessing him and his company's every decision, it's not likely he's willing to make that sort of a gamble to achieve that goal.


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Comments


Michael Joseph
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if it's trading "below the per-share value of the company's cash, securities and real estate assets" it's because investors believe those cash and securites are going to be burned through.

I can't see Zynga spending money to buy back shares when it can't afford to lose that cash.

Their IP is worthless because their games are so generic.

Why doesn't Zynga use their cash to buy a "real" game company? (Something like AOL did when they bought Time Warner) If they wont shell out their cash to do that, why would they shell it out to buy back their own failing stock?

This seems like a smokescreen to me. Maybe they are desperate to raise the price of the shares on these sorts of buy back rumors to help them settle their investor lawsuits at a lower cost.

Keep an eye on Zyngas cash. See where it goes.

If you were CEO of Zynga, what would you do? Layoffs seem inevitable.

p.s if you're a major gambler, maybe buy some Zynga at 2.40 - 2.50 and look to sell it at 5 bucks after it closes the gap... that is if you put any faith in technical analysis. I won't because I can't go long on a company I just don't like.

Carlo Delallana
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I don't think Zynga needs to buy a "game" company. Rather, I would like to see their talent unleashed and there's plenty of talent in their ranks.

Joe McGinn
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"Well ... that escalated quickly"

William Hearn
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Based purely on my impression of the company, it seems the single best way for Zynga to come around to gamer good graces would be for Pincus to step down and have nothing to do with the company.

Joe Wreschnig
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I can't see any reason - creatively or financially - Zynga should care about "gamer good graces."

Anthony Giallourakis
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Zynga should consider moving more resources away from digital gaming and more towards destination/location based entertainment, using their social network base of fans to create friend-in-person gaming opportunities.

Everyone is so concerned about mobile, they fail to realize what mobile's real gaming opportunity is. This is the next big green field gaming opportunity. The most likely partner for Zynga here is GameStop, since they have so many under-utilized brick and mortar locations. Also Blockbuster...

Bob Johnson
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The reason they go private is because they think the company is undervalued.

When its overvalued they go public.

I'll let you do the "who gets screwed in each case" math.

Michael Wenk
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Just looking at Zynga's financial numbers, I would wonder why so much R&D? If the reason for that is because they are public, then there may be merit for them to go private. But just going private isn't going to fix the fact that they are in the red. They need to increase revenue, or decrease cost. I can't see them going private and doing more funding rounds, and even if they did they'd eventually get back to the point where they have to go public.

Gary LaRochelle
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Why Zynga went public: http://finance.fortune.cnn.com/2011/12/16/zyngas-pincus-why-we-we
nt-public/

From the article:

"There has been widespread speculation that a large number of Zynga employees will leave the company once they are allowed to sell shares. Why?

I'm not sure why there's been all that speculation other than that we've been in a quiet period. Our company has historically had very low attrition, much lower than other public or private companies in Silicon Valley. I know that hasn't been reported on, but it's true. We also continue to have an amazing inflow of resumes and talent.

When you think about what keeps talent at a company, it comes down to three points:

1. Do employees believe in the mission and direction of the company. I believe they do, because Zynga offers a unique opportunity to build games for the broadest audience ever seen in games.

2. Do employees feel they have great career mobility. And I'd point you to the fact that a culture of leveling up is one of our values. More than 60% have leveled up annually, which means they've taken on greater leadership roles and compensation each year. When we're past the acquire period and you can talk to actual employees, I think they'll tell you they have more opportunity for mobility here than if they worked at any other company.

3. Our teams manage themselves, which means they have a great amount of control over their work environments.

Beyond that, our culture runs deep. Our employees have a real love for Zynga and real pride. We've asked them not to go out and defend us in the press or blogs, so I don't think that's come through publicly yet. -Mark Pincus"


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