By Malathi Nayak and Gerry Shih
SAN FRANCISCO Oct 8 Zynga Inc's
inexorable decline over the past six months, capped by a sharp
reduction in its 2012 outlook on Thursday, has sharpened
interest in what Chief Executive Mark Pincus will do next.
Wall Street's excitement over a game publisher once counted
among the stars of the new social Internet has cooled since its
December initial public offering. On Friday, analysts slashed
their price targets on a stock that dived as much as 22 percent,
to $2.21 - more than three-quarters off its $10 debut.
The fate of the company now rests with Pincus, the
46-year-old co-founder who controls a majority voting stake.
Analysts say he needs to downsize its current 3,000-strong
global workforce and come up with a hit that can captivate the
growing number of players now moving to mobile devices, where
its presence is relatively weak.
Zynga did launch several such games this year, including
"The Ville" and "ChefVille," and is working on several more. On
Thursday, Pincus emphasized to employees in a company-wide memo
that Zynga would be "continuing to invest in its mobile games
But he warned that the company will make "targeted cost
reductions," which analysts interpreted to mean layoffs as
Pincus shifts Zynga away from the "casual" Facebook games, like
"FarmVille," that were the company's bread-and-butter for years.
"They have banked on the casual gaming segment, and to
readjust the business to more core gaming, some casual heads
probably have to roll," said P.J. McNealy, CEO of Digital World
The transition will be jarring for a company that moved
early to build a formidable business almost completely on top of
Facebook's burgeoning platform. "FarmVille," "FrontierVille,"
"Zynga Poker," "Mafia Wars" and "CityVille" took off primarily
as Facebook games on personal computers. They accounted for 83
percent of total revenue last year.
Zynga has not been able to reverse the tide of users
abandoning its previously lucrative Web-based games for
offerings on smartphones or games from competing publishers.
Monthly-paying players rose to 4.1 million in the second
quarter from 3.5 million. That number would have declined had it
not been for new players attracted to "Draw Something," which
Zynga purchased in March. The company said on Thursday it will
write off about half the game's $183 million price tag.
One saving grace for Pincus may be Zynga's large cash
holdings, which amount to roughly $1.6 billion and will stave
off any talk of bankruptcy. And Zynga's revenues, while
shrinking, remain substantial.
"This is an expectation game," McNealy said. "If people are
looking for a possible turnaround in three months it's probably
unlikely. If people are looking at the next 12 to 18 months,
then it's possible."
Pincus' attempt to revive his company has been undermined by
an accelerating employee exodus.
On Friday, the two creators of "Words with Friends," one of
Zynga's most popular mobile games, announced that they had
departed, following more than a dozen key employees who have
left in the past six months.
"The departures underscore our skepticism about ZNGA and its
ability to address the challenges it faces as it pivots towards
mobile and its in-house gaming platforms," Brian Pitz from
Jefferies & Co wrote in a research note on Friday. "Yesterday,
CEO Mark Pincus asked employees to not lose sight of the bigger
picture, but this may not be enough."
Besides betting big on mobile, Pincus hopes to capture
growth in online gambling games, an effort that could take years
to pay off. It could take 18 to 24 months for U.S. authorities
to legalize it, McNealy said.
Zynga Poker, where players win virtual currency as opposed
to real cash, is the world's largest online poker game. The game
constituted 18 percent of Zynga's $332.4 million revenue last
quarter, behind "FarmVille," which brought in about 29 percent.
Zynga plans to seek out overseas markets such as the United
Kingdom and France, where online gambling is partially legal.
Pincus told analysts on an earnings call last quarter that these
first real-money gaming products would launch in the first half
Some on Wall Street now speculate about the possible
takeover of a company whose stock has fallen more than 80
percent from its high earlier this year.
For most of Friday, Zynga traded below the company's book
value of $2.30 a share according to Thomson Reuters data - the
sum value of its assets including real estate holdings and
roughly $1.6 billion in cash.
Tom Taulli, an editor at IPOPlaybook.com, said the names of
potential acquirers being bandied about have included Amazon
, Yahoo and Activision, the game
publisher that has a small presence on Facebook and
smartphones, two platforms where Zynga has invested heavily.
Even at such a discount, analysts warn that Zynga, valued at
$1.88 billion, may not be a natural acquisition target for
interactive media companies, given the uncertainty about Zynga's
business and the mixed results of major social gaming deals
Last July, Electronic Arts acquired PopCap Games for
$650 million in cash plus stock but recently laid off employees
and shuttered a PopCap studio. And analysts have continued to
second-guess Walt Disney Co's $763 million deal for
Playdom in 2010.
"Disney and EA have a pretty sour taste in their mouth,"
said Richard Greenfield, an analyst at BTIG. "Everyone who has
tried to make a purchases in this sector is losing money."
Sterne Agee analyst Arvind Bhatia said most acquirers would
probably wait a while longer to see how Zynga fares.
"In a situation where you have fundamental problems and the
business is deteriorating, it's going to be tough" to negotiate
a sale, Bhatia said. "What's needed is swift action to
right-size the company."