2 Big Reasons Yahoo! Won't Buy Zynga

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Shares of Zynga (NASDAQ: ZNGA  ) popped by as much as 11% Monday after Wunderlich Securities analyst Blake Harper suggested it might make sense for Yahoo! (NASDAQ: YHOO  ) to acquire the social game maker.

To be sure, the rumor mill has been buzzing ever since word got out last week that Jackie Reses (Yahoo's head of mergers and acquisitions) let it slip to employees that the company was working on two "significant" acquisitions. 

Unfortunately for the Zynga bulls, I just don't see a buyout happening for myriad reasons. For the sake of brevity, however, here are two of the biggest things that would make Yahoo! think twice about entering the social gaming space via Zynga.

Less-than-stellar management
Sure enough, shares of Zynga lost ground Tuesday after analysts at Macquarie Capital poured cold water on the buyout thesis, saying "We believe that Zynga is unlikely to be acquired anytime soon, as we don't believe that Mark Pincus wants to sell at this time."  

Yep, that's the same Mark Pincus named The Motley Fool's Worst CEO of the Year in 2012. Still, even if Yahoo! actually wanted to buy his company, would you blame him for not wanting to sell? After all, Yahoo! CEO Marissa Mayer has been taking flak this week for her notoriously stringent hiring standards and, given Pincus' painful past transgressions, something tells me any Zynga buyout scenario likely wouldn't involve keeping him around.

Then again, perhaps that wouldn't be much of an issue anyway, since Pincus hasn't shown much restraint with regard to dumping his own personal stake in his company. Nonetheless, his persistent demonstrations of a lack of faith in Zynga don't bode well for its prospects, especially when we remember eight of its high-profile executives voluntarily packed their bags last year between August and September.

All things considered, none of this is particularly encouraging to potential suitors.

Stronger, cheaper acquirees
With Zynga's market capitalization at just under $3 billion, Yahoo!'s $4 billion in cash and liquidity (as of the end of 2012) would require a good amount of their dry powder to acquire the company outright. Even accounting for Zynga's own veritable cash pile of $1.3 billion, the fact remains Zynga is still barely profitable. In addition, I'm hardly alone in believing its business is simply unsustainable over the long run.

Besides, Harper's mention of Zynga seemed more of an afterthought following more serious speculation about why it might make sense for Yahoo! to purchase smaller companies like restaurant reservation specialist OpenTable or review provider Yelp -- the respective market caps of which are significantly lower ($1.4 billion and $1.5 billion).

In addition, the functions of Yelp and OpenTable also appear to more closely align with Mayer's stated goals of focusing on making Yahoo! an integral part in consumers' "daily habits," including things like searching the Internet, checking finance, and handling email. If Mayer had any significant interest in expanding Yahoo's gaming presence, you'd think she would have made more notable mentions of it to date (that is, unless they're trying to keep a significant gaming acquisition quiet).

On one hand, however, I'm still not entirely convinced that Yelp's ad-reliant business is built to last, especially considering its own poor fourth-quarter earnings report from last month.

On the other hand, at least OpenTable is not only cash-flow positive from operations, but also has actual trailing earnings to report -- even if it is currently trading for nearly 60 times those earnings. In addition, considering OpenTable's return on invested capital of 14.3%, the company has continuously demonstrated an enviable knack for creating shareholder value by reinvesting capital in its business. With this in mind, I should think OpenTable is the most attractive buyout candidate of the bunch.

What now?
Even given Zynga's recent online gambling aspirations, I still can't picture a scenario where the company can survive (much less thrive) over the long term. Let it suffice to say, then, it'd be a hard sell to convince me Zynga is a bona fide acquisition target.

More expert advice from The Motley Fool
Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.

Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

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 March 13, 2013, at 1:01 PM, allworld23 wrote:

    Motley Fool? I am shaking my head at yet another Zynga bashing. Please understand that Zynga is moving its forces in the direction of the online gambling movement. This movement sparked the resignation of the 6-8 managers that left Zynga. The reason the managers and programmers left is this reason. They have NO gambling experience and Pincus is taking Zynga into the online gambling arena. Zynga is partners with Party Poker. Anyone who has gambled on internet gaming knows that Party Poker was the champ and then came Poker Stars. The difference between Party Poker and Poker Stars is this. Party Poker layed down when the U.S. government cracked down on the internet gambling and Poker Stars did not. Party Poker is more, "in favor" with the U.S. government.

    If anyone would take over Zynga, they would be taking over the 36 million poker players that play on Zynga. So let me ask you this," if you were opening an online casino, where would look for customers"? Of course you would look at the 36 million poker players on Zynga. These leads would be tremendous value for Zynga.

    Zynga does not need anyone. They will be set in the internet gaming arena. Pincus is taking this company deep into the gaming arena. Zynga could very easily be a 100$ stock in 3 years.

    If you are not going into internet gaming, then you do not need Zynga. However if you are thinking about getting into the online gaming, then you WANT Zynga.

  • Report this Comment On March 13, 2013, at 2:15 PM, samz123 wrote:

    I'm sorry but they DO need someone-- half their games crash and they have bugs galore. They admit they can't find the leak somewhere so they need COMPETENT programmers.

    some of their games work great. but when it's bloated full of quests it starts to get sluggish. One game has gone to the unicorns, pegasus and partnering of neighbors and the people have REQUESTED on the forums to stop adding that stuff but they continue anyhow.

    their poker may not need anyone...except players

  • Report this Comment On March 14, 2013, at 7:41 AM, kimbaclark777 wrote:

    zynga would be a bad buy because hackers have found a way to get in a steal from the users. it is getting to the point that people are tired of asking support for their chips back and it takes months to get them if at all. also the "bot" or app problem has gotten way out of hand. this is a cheat application where they can download this program and steal your chips. zynga has never done anything to correct this problem. anyone who buys zynga will face this problem and correcting it. good luck. I have already moved on to free poker. sick of being robbed.

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