Why Zynga Inc (ZNGA) Could Soon Be Acquired

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Zynga Inc (NASDAQ:ZNGA) is in serious trouble. Shares of the troubled social game maker seem to plunge to lower all-time lows every day. Earlier this month, I discussed several reasons why investors should avoid Zynga at all costs – its broken business model, shrinking workforce, lack of a defensive moat, and a last ditch investment in online gambling all indicate that it might be “game over” for the maker of Farmville, Words with Friends and Draw Something.


But enough doom and gloom already. If there’s any value left in Zynga Inc (NASDAQ:ZNGA) shares, it’s in the hope that a buyout offer from a larger tech company could save its shares from being delisted. In this article, I’ll discuss two potential suitors for Zynga, and how they can benefit from acquiring the company, which currently has a market cap of $2.0 billion. By itself, Zynga might be doomed, but as part of a larger company, it could actually bounce back.

Some frustrating fundamentals

The big problem is that Zynga Inc (NASDAQ:ZNGA) is currently unprofitable. Last quarter, the company reported a year-on-year revenue decrease of 17.9% and a profit margin of -9.8%. It also has a negative 5-year PEG ratio of -2.6, which indicates that Wall Street doesn’t expect this company to grow its bottom line anytime soon. Despite its low price, Zynga Inc (NASDAQ:ZNGA) still trades with a price-to-book ratio of 1.15 and a price-to-sales ratio of 1.76, which both indicate that the stock could still be overvalued at $2 per share. To make matters worse, daily and monthly active users respectively declined 20% and 13% from the prior year quarter.

On the bright side, the company has no debt and $1.27 billion in cash and equivalents. This means that any prospective buyer could buy the entire company at a small premium over $2 billion, without assuming any additional debt.

Microsoft could use Zynga to boost its mobile presence

For Microsoft Corporation (NASDAQ:MSFT), which has $73.8 billion in cash, Zynga could be the shot in the arm that the company needs to boost its Windows Phone 8 sales. Although Windows Phone recently claimed third place in global mobile operating systems, surpassing BlackBerry, it still trails Google Inc (NASDAQ:GOOG) Android and Apple Inc. (NASDAQ:AAPL) iOS significantly with a tiny 3.2% market share.

Although Windows Phone 8 devices, especially those from Nokia Corporation (ADR) (NYSE:NOK), have been well received for their creatively designed “Live Tiles” and fluid operating system, many users have complained about the lack of Windows Phone 8 versions of popular apps and games that are readily available to Android and iOS users. To remedy this, Microsoft Corporation (NASDAQ:MSFT) is now offering all developers $100 for any app published in the Windows store by the end of the month.

With 145,000 apps in its app store, Windows Phone 8 is no slouch, but that number pales in comparison to Google’s Play Store and Apple’s App Store, which each feature over 700,000 apps. Many crucial apps, such as Instagram and Vine, aren’t available yet on Windows Phone 8, much to the chagrin of many users.

However, investing in Zynga Inc (NASDAQ:ZNGA) could change all that. Although Zynga’s numbers are dwindling, bringing mobile games such as Words with Friends, Farmville, Draw Something and Zynga Poker could convince many Windows Phone users that they aren’t that far behind their Android and iOS wielding peers. Offering Zynga games on Windows Phones could also force the company’s primary competitors – Candy Crush creator King and Electronic Arts Inc. (NASDAQ:EA) – to port their games over to Windows Phone as well. Suddenly, Windows Phone 8 won’t seem like a barren wasteland for gamers anymore.

Being purchased by Microsoft Corporation (NASDAQ:MSFT) would also solve Zynga’s weak cash flow, which stood at $21.5 million at the end of last quarter. Microsoft could merge Zynga into its Microsoft Studios division, giving it the license to create casual versions of its more popular franchises, such as Halo and Fable. Zynga could then have some firepower to fight back against EA, which has steadily eroded Zynga Inc (NASDAQ:ZNGA)’s market share with flashier titles based on more popular franchises.

Activision could diversify into social games

As a former Activision Blizzard, Inc. (NASDAQ:ATVI) shareholder, the thing I’ve always loathed about the company is its lack of diversification. The company’s entire business model is based on Call of Duty and World of Warcraft, and a slip in customers in either franchise generally result in shares plunging. However, the company has recently concentrated on diversifying into other titles – such as Blizzard’s Starcraft 2 and Diablo 3 – and hybrid toys with Skylanders. Therefore, diversifying into social games would be a logical next step, since its primary competitor, Electronic Arts, is already there.

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