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Facebook Should Buy Zynga

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Facebook's (Nasdaq: FB  ) good for the money.

The Wall Street Journal reported late on Friday that the social-networking website operator wants to cut its credit line in half. Going from $3 billion to $1.5 billion to draw from -- and extending the terms of the potential borrowings from one year to three years -- makes sense.

Facebook closed out its latest quarter with $10.2 billion in cash and marketable securities on its balance sheet. Analysts see the company earning more than $1 billion this year and roughly $1.7 billion in the year ahead.

That's a lot of money for a company that's merely scratching the surface in terms of its monetization possibilities. Aside from appeasing investment bankers, there's really no point in having a huge line of credit open.

Besides, what does Facebook really need with all that dough? It's not as if it can't already buy just about any company it wants to. Heck, it could even buy Zynga (Nasdaq: ZNGA  ) .

Yes, Zynga. Don't laugh. Hear me out first.

The 800 pound Farmville gorilla in the room
Zynga's in trouble, and Facebook is paying the price. Shares of Facebook tumbled nearly 5% on Friday. The out-of-favor dot-com bellwether fell because Zynga is slashing its near-term outlook. In other words, a 12% plunge in Zynga led to the 5% slide in Facebook.

This is a recurring problem. When Zynga's stock fell 37% on July 26 after reporting a sequential dip in bookings -- suggesting that the social-gaming leader's business may be peaking -- Facebook's stock took a 12% hit that day.

On the surface, it may seem that when Zynga gets slammed, Facebook gets roughed up a little -- but it's worse than that. Zynga's market cap surrendered $1.4 billion of its value on July 26, but the larger Facebook coughed up $6.7 billion on the smaller percentage move. On Friday, it was Zynga losing $260 million to Facebook's $2.8 billion haircut.

For Facebook, though, buying Zynga would be more than just falling on a grenade. Zynga can be had for very little, and it can do far better in Facebook's hands.

You will "like" this deal
Perhaps the only upside of seeing Zynga shed more than 75% of its value since going public at $10 is that it's trading for nearly the net cash on its balance sheet. Zynga now fetches an enterprise value of roughly $1 billion -- the same Zynga that months before going public had some industry watchers valuing it as a $20 billion company.

There's a sale going on. As iffy as Zynga may be, $1 billion is a steal. Isn't that essentially what Facebook paid for the revenue-less and deficit-riddled Instagram earlier this year? Sure, Facebook would have to pay a premium to take Zynga out of its misery, but at least Zynga is profitable and generating real revenue. After overpaying for Instagram, the market may see this as a relative upgrade in Facebook's buying habits.

Zynga would help Facebook's ad business. The companies are already on the same page when it comes to Facebook apps, and they struck a deal last month to populate with Facebook-sold ads. Buying Zynga would mean not having to share the ad revenue, or the even bigger money that Zynga makes on Facebook itself. Zynga relies on Milliennial Media (NYSE: MM  ) to serve up its ads on smartphone applications, but Facebook could make a play for that and prove to cynical analysts that it can have more skin in the mobile-monetization game.

Skeptics will argue that a deal would hurt Facebook's stature with its developers. You know, folks accused Google (Nasdaq: GOOG  ) of the same thing when it made the controversial call of buying Motorola Mobility. Yet Google's Android continues to gain market share, and the stock hit a new all-time high on Friday.

You can own an ecosystem and still play in the water. Apple (Nasdaq: AAPL  ) does it. Would Zynga games be perceived as more Facebook-approved in a post-acquisition world? Sure -- and that wouldn't be a bad thing for Zynga as its stature grows on a social network that's now brimming with more than a billion active users.

Facebook needs to buy Zynga before Zynga kills again. Admit that much. Turning Zynga into a business that will help grow Facebook's revenue and earnings, justifying its lofty valuation along the way, is merely a bonus.

Do it, Facebook. You know you have to.

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Longtime Fool contributor Rick Aristotle Munarriz owns shares of Millennial Media. The Motley Fool owns shares of Apple, Facebook, and Google and has options on Facebook. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2012, at 3:51 PM, plange01 wrote:

    now everyone knows why they fought so hard not to go public! fraudbook was a social ponzi scheme! and for once wall street got taken like everyone else!

  • Report this Comment On October 06, 2012, at 4:15 PM, DutchMark wrote:

    In general it's bad business long-term to compete with your own customers. So I'd think buying Zynga would be a very bad idea for Facebook. You can't compare it to Apple, which makes its money selling the devices, not by monetizing their own platform.

  • Report this Comment On October 07, 2012, at 10:11 AM, orangemen90 wrote:

    Good analysis.... but these companies are built to die after cash reward for the owners.. they are not future thinking managed companies.. so in this order these companies will cease to exist,.,, zynga, facebook... then... remember xerox, kodak......then Apple will no longer be on planet earth....

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