Should Mark Pincus Take Zynga Private?

Published on October 7, 2012
by Tricia Duryee

With all the negative swirl around Zynga — its prospects worsened last week after the social games company admitted that its business was deteriorating faster than expected — one of the more interesting possibilities being debated quietly among some players in Silicon Valley is whether it might opt to go private to get some much-needed breathing room.

It’s the latest of several options that have been floated, including whether Facebook or others might try to swoop in to buy the company.

Most of these scenarios are moot, given Zynga’s founder and CEO Mark Pincus controls the troubled company, owning more than half of its shares. It is not clear if he would be willing to give up now.

That said, he has do something — the company’s stock hit a new low on Friday, tumbling 12 percent to $2.48 a share. At that price, investors are valuing the business at very little, since Zynga has the equivalent of $2.10 a share in hard assets.

That price could get lower, with Wall Street investors and many others becoming even more relentless in their criticism of Zynga.

There have been many concerns already that began after its once close partner, Facebook, changed the way it operates, with the result that its platform did not perform as well as it once did for Zynga, especially for its once popular Ville-style games.

It’s been made worse as consumers continue their shift to mobile, which Zynga says does not always monetize as well as Facebook.

To add to the pile, Zynga has suffered mass exodus of talent, some for better and some not. Over the past few months, it has lost several high-ranking managers, including its COO John Schappert and Chief Marketing Officer Jeff Karp, who were both brought on board for their experience in gaming. Last week came the departure of Paul and David Bettner, the creators of Zynga’s enormously successful Words With Friends franchise.

There was plenty of other fodder for criticism this past week, after the company also wrote down the acquisition of OMGPOP by as much as $95 million, or about half of the total price.

In a memo issued to employees on Friday, Pincus wrote that he was disappointed and is focused on rectifying the situation.

In the near term, he said it might mean considering “targeted” cost reductions. And in the longer term, he noted that Zynga would have to invest more in mobile and a platform approach that enables it to publish third-party game titles.

Whether he can do that easily with intense shareholder scrutiny is questionable, and ditching the public markets would have its advantages.

To get a sense of where Zynga stands, and whether going private is feasible, I talked to a handful of analysts and experts, all whom had mixed opinions.

Michael Pachter, Wedbush Securities:

At this price, yes, Zynga can go private, but I don’t think that will happen. That would trigger more unrest by shareholders, who would say you sold shares at $10 and now you want to buy them back at $3? It would have the appearance of some sort of scheme.

If he [Pincus] wants to send a signal to investors that they are done making acquisitions — since they obviously didn’t do a very good job at it — they should take some of its war chest and buy back stock. He should also personally buy stock. We need to see that kind of commitment.

Peter Relan, executive chairman of CrowdStar, which pivoted from social to mobile gaming this year:

I have three solutions: Mobile, mobile, mobile. Mobile gaming this year globally is a $2 billion to $3 billion business and is expected to hit $18 billion by 2016. I don’t think there’s a lack of growth in gaming; it’s more product strategy.

Mark is a competitive guy and he’s going to fight like hell to transform the company and take it to the next level.

Arvind Bhatia, analyst, Sterne Agee:

They need to restructure the business significantly and do it very quickly, too. We think that they are considerably overstaffed for the level of revenue that they’ll be generating in the coming years.

They need to right-size and preserve the cash. Going private won’t solve the problem … the question is, where will the cash be in a year from now?

Rich Greenfield, analyst, BTIG:

They will generate zero EBITDA in the back half of 2012 based on their new guidance and earnings in 2013 and beyond are totally unclear — the company’s assets are literally walking out the door — you see the Words With Friends team left.

Why would they want to lever up and go private — sounds petrifying … Zynga clearly has no idea how to model/project their business/earnings, in turn, going private would appear to be a very dangerous move, don’t you think?

They need to make great games that have staying power.

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