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Does a Zynga-Yahoo! merger make sense?
Does a Zynga-Yahoo! merger make sense?
March 12, 2013 | By Chris Morris




Zynga shares soared Monday, after an analyst's report mentioned the social game maker was a possible candidate for a takeover -- by Yahoo!, of all companies.

Wunderlich Securities' Blake Harper got the ball rolling, noting that while Yahoo! has been reported to be sniffing around Yelp and OpenTable, Zynga (along with Tumblr and FourSquare) would be a good match as well.

On the surface, it sounds like an odd couple -- and the immediate reaction of many people in the game industry is to shrug it off. But Zynga's shares popped 10 percent on the news -- and they're moving higher again today.

So that raises the question: Does a pairing of these two seemingly opposite companies make sense?

Yes. And no.

Yahoo! is a company that's looking to boost traffic and hone its focus. CEO Marissa Mayer also has a tech background that might make Zynga attractive to her. Web-based gaming is still a strong category that has notable earnings potential -- especially for a portal like Yahoo!.

Yahoo! already has a games channel, but it's certainly interested in boosting the earnings potential of that page. And so far, it has no real game presence in the mobile space -- an area Mayer has indicated she wants to see Yahoo! boost its presence. (Full disclosure: I was Managing Editor of Yahoo! Finance for a year and currently freelance for Yahoo! Games -- but I have no direct knowledge of corporate strategy. Heck, I don't even get the free lunches that staffers do.)

Zynga, of course, has a notable profile both in mobile and Web-based games.

Takeover target

And make no mistake, Zynga certainly has all the signs of a takeover target. Its shares, despite recent rebounds, are still low -- but it's actually one of the year's best performing stocks (climbing roughly 50 percent year to date). Most of its stock price is accounted for in its cash holdings, as well -- meaning the company is actually worth much more when you add in real estate, etc.

But there are a number of hurdles that stand in the way of an offer by Yahoo!

First, there's the gambling. Zynga is in the midst of repositioning itself as a different sort of gaming company -- in an area that Yahoo! has no interest in exploring. Family-friendly is the motto of the company. That's why you almost never see stories about sex, drugs or alcohol on the premiere real estate of the site's front page.

Also, Zynga's star in game industry circles has dimmed notably. Buying the company would be a turnaround project -- and Yahoo! has plenty of those of its own to handle these days. Zynga's video game presence isn't ascending these days. And when you add in the talent drain the company is experiencing, that's going to be a tough tide to turn.

Mayer can't afford the distraction from the core problems of Yahoo! right now. Investors would riot -- and she would risk finding herself in the same scrap heap as Jerry Yang, Scott Thompson and Carol Bartz.

Ultimately, though, it really doesn't come down to Yahoo!. And it certainly doesn't matter what Zynga investors want. The key component, as it is with everything Zynga, is Mark Pincus.

Making a believer out of Pincus

Let's say, for the sake of argument, that Yahoo! really, really wanted Zynga -- and offered an attractive price per share. Investors would likely cheer. But if Pincus didn't feel like selling, the deal wouldn't happen -- no matter how generous the offer.

Pincus, remember, holds 70 times more voting power than all of the common stock on the market -- so the performance of the stock has little to no impact on him. (He's also the landlord for the company's office, pocketing $28,000 per month in rent -- last we heard.)

Pincus has always followed his own vision for the company -- and he seems committed to the gambling future now. And with Nevada and New Jersey lining up to legalize online gambling, things seem to be falling into place with that.

Unless Mayer has some unknown strategy up her sleeve that can not only appease her own shareholders, but make a believer out of Pincus, don't expect this deal to happen anytime soon.

Investors now seem skeptical of a company sale. Zynga stock retreated 4 percent Tuesday as investors had more time to digest the analysis, and in the wake of comments from Zynga board member Bing Gordon, who said Zynga may want to stay independent.


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