Zynga? No.
While I applaud Mayer’s recent steps to conservatively grow Yahoo again, I think Zynga would be a terrible acquisition. Although Zynga generates approximately $1.28 billion in annual revenues, the company is unprofitable.
Last quarter, it reported a loss of 6 cents per share on a 15% drop in revenue to $261 million. A negative profit margin of -16.35% has also kept the company in the red. I don’t think acquiring Zynga, which may cost well over $3 billion with a premium included, could be earnings accretive at all.
I also think Zynga Inc (NASDAQ:ZNGA)’s lack of originality shows that it is a market follower, rather than an innovator. Many of Zynga’s most successful games have been cloned from more successful franchises. For example, Electronic Arts Inc. (NASDAQ:EA)’Sims Social was cloned as The Ville, Slashkey’s Farm Town became Farmville, and David Maestri’s Mob Wars was turned into Mafia Wars.
Zynga Inc (NASDAQ:ZNGA) has been sued numerous times over these cloned games. Why would Yahoo senselessly expose itself to litigation from other gaming companies to protect a company that isn’t even profitable?
Even Facebook has taken steps to reduce its exposure to Zynga, one of its most important partners.
Better deals on the horizon
Rather than shell out $3 billion for Zynga, Yahoo should concentrate on more logical acquisitions.
Mayer had previously expressed interest in microblogging social site Tumblr, as well as location app Foursquare, which could both strengthen its defense against Facebook, by combining Tumblr’s social networking capabilities with Foursquare’s check-in and location sharing abilities.
Pinterest, which was recently valued at $2.5 billion, has also been cited as a possible target, and could radically boost the company’s revenue if it effectively monetizes its extremely ad-friendly business model.
The Foolish Bottom Line
While I won’t pretend to know what Mayer is cooking up at Yahoo, I firmly believe that her recent acquisitions show a strong desire to build a Yahoo-branded ecosystem. This will help Yahoo overcome the lingering perception that it is an aging Internet portal that is increasingly disconnected from the needs of mobile users.
Acquiring social sharing sites and apps, as well as location review sites, show that it is ready to take on Facebook. Acquiring video chat creators show that it may be about to a more aggressive stance against Microsoft Corporation (NASDAQ:MSFT)’s Skype and Apple Inc. (NASDAQ:AAPL)’s FaceTime.
Regardless of what Mrs. Mayer plans to buy with her “two large acquisitions,” the message is clear – Yahoo isn’t afraid to expand anymore, and it refuses to be pushed into a corner and forced to sell itself off in pieces.
The article Is Zynga Next on Yahoo’s Shopping List? originally appeared on Fool.com and is written by Leo Sun.
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