October 5, 2012

Zynga's Business Is Now Worth Less Than Its Building

650 Townsend

Having cut projections once again, Zynga is currently trading at $2.32 a share for a market cap of $1.76 billion. With around a billion and a half dollars of cash on its books, however, Zynga’s enterprise value is currently $223 million, five million less than the $228 million it paid for its headquarters building at 650 Townsend in San Francisco earlier this year.

As we wrote in July when we broke the news of Pincus' Pacific Heights purchase:

While Zynga is currently trading at $5.57 per share, 44 percent under its IPO price of $10 per share, a few insiders including CEO Mark Pincus managed to dump over $500 million worth of Zynga stock at $12 per share in a secondary offering, the proceeds of which went into the insiders' pockets rather than the coffers of the company.

If the thought of Pincus having bought a home with its fortresslike qualities and security in mind seemed like a stretch, perhaps it seems like foresight now.

While Zynga Trades Down, Pincus Trades Up [SocketSite]
Will Zynga Be A One House Wonder? [SocketSite]
It’s Game On With A Hand Out As Zynga Demands Tax Breaks As Well [SocketSite]

First Published: October 5, 2012 8:30 AM

Comments from "Plugged In" Readers

Usually when a firm's market cap drops below its book value it is time to buy. Why not for ZNGA?

Posted by: The Milkshake of Despair at October 5, 2012 9:09 AM

Could someone please explain the last sentence of the article? What is the benefit in purchasing a building worth more than your enterprise value?

Thank you!

Posted by: B at October 5, 2012 9:46 AM

I would put an emphasis on "Usually", MoD. Can they turn this around and find a second wind?

Zynga's income stream business model is like the Bushman on Fisherman's Wharf. You only get caught the first time. They have to find a new paying gig.

Posted by: lol at October 5, 2012 10:02 AM

@B:

Take a look at the link to Pincus' Pac Heights buy. Apparently some people dislike him, and a number of comments are suggesting he get really good security "just in case." Since he still seems to be making out much better off of the people that invested in his company than people that invested in his company did, that might just be doubly true now.

Posted by: rob at October 5, 2012 10:15 AM

The irony is that the value of the building is brought down by having them as a tenant. I'm sure that's not the argument TMG made when they sold it to them!

Posted by: DB73 at October 5, 2012 10:34 AM

@ milkshake:

Enterprise value and market cap are different animals. Enterprise Value is a valuation that takes into account debt obligations and a whole variety of other things. Market Cap is simply the value of a firm's outstanding shares.

Posted by: Lance at October 5, 2012 11:11 AM

Video gaming companies - no matter what platform - are like movie studios. They need to have a steady stream of hits to keep profitable. Like Atari and so many others, they depend on a fickle audience. Unless Zynga finds some new hits, they will wither and die. Ultimately, all that will remain will be a few people who lined their pockets and a building that's up for sale.

Posted by: jlasf at October 5, 2012 11:30 AM

they should plant some corn.

Posted by: jc at October 5, 2012 11:50 AM

"enterprise value" a.k.a. takeover value.
I learn so goddamn much on this site.

Posted by: Jimmy at October 5, 2012 12:08 PM

So monetizing peoples' wasted time on the internet hasn't turned out to be a great idea. Shocker!

Posted by: Zouaf at October 5, 2012 12:42 PM

Why not for ZNGA?
MOD, I'm trying to figure out if I'll go the due diligence route or just throw some money at it and hope for the best. One way to look at them is as a well funded startup with Pincus at the helm plus the actual Zygna business.

Posted by: EBGuy at October 5, 2012 12:45 PM

EBGuy,

Pincus asked for many of the shares back from his employees prior to the IPO, gave himself a bunch of shares at a secondary offering, then cashed out and bought himself a mansion.

I don't know if he can run a company, but he's brilliant at personal finance.

Posted by: lol at October 5, 2012 12:59 PM

I guess the reason not to buy would be if there is a risk that the current management could do a "controlled flight into terrain" as the aviation euphemism goes.

My original question was prompted by a similar situation that I took advantage during the dot com boom. But that was an investment into a century old established manufacturer that for some reason had fallen out of favor. Different animal here.

Posted by: The Milkshake of Despair at October 5, 2012 1:04 PM

Their best hope is for someone to buy them out, but I doubt they have many lookers at the moment. My prognosis is that ZNGA is dying a not so slow death. Employees are leaving or looking to leave in droves, and they can't afford to pay the premium that it takes to retain good talent. Zynga as we know it will likely not exist in 24 months...just my opinion.

Posted by: Lance at October 5, 2012 2:08 PM

At least the $228 million Zynga paid for its building went towards an appreciating asset, or at least one that tends to hold its value.

I read this earlier today: Zynga's Burst Bubble Gives New Meaning to "OMGPOP", fourth '
graph:

…Zynga in March bought OMGPOP, the New York-based studio behind the hit game "Draw Something," for some $200 million. And, of course, it turned out that OMGPOP couldn't recapture the magic either. CNET reports that Zynga has already written off $85-$90 million of OMGPop's original value. To put that in perspective, TheNextWeb notes that Zynga's OMGPOP loss pencils out to nearly $500,000 a day.

Losing half a million dollars per day on an acquisition is a lot worse way to spend investor's money than buying the headquarters building.

At least their not enriching a commercial landlord by renting.

Posted by: Brahma (incensed renter) at October 5, 2012 2:51 PM

Really a sad and somewhat bizarre story for many involved. Not sure why so many people relish the fact that they are failing. I mean, we want our city to innovate, retain talent, inspire and flourish right? It's similar to this left wing right wing zero sum game crap.

FWIW, I do agree that Pinkus is a douche.

Posted by: kg at October 5, 2012 4:03 PM

kg,

A quick comparison:

There's only love for AAPL around here. The reason is AAPL creates a fantastic product that people love, and shares its wealth between 1000s of local employees. ZNGA creates game crack, sometimes digs into the pockets of kids, management pads its own pockets backstabbing their employees who are left hanging high and dry.

dunno. I can't really find a reason...

Posted by: lol at October 5, 2012 4:13 PM

I used to work in that building (Terracotta) and, honestly, things started going much better for us after we moved out.

Just sayin'...

Posted by: GaryFolsoma at October 5, 2012 4:16 PM

Oh right, because AAPL doesn't have Chinese slaves and hasn't done a number of sketchy things to defend its market dominance or anything. I forgot. Good comparison.

Posted by: kg at October 5, 2012 4:25 PM

@ Brahma,

They already enriched a commercial landlord by buying the building they had been renting from the same landlord (TMG paid around $131MM for it, not sure exactly when -- and I'm sure they did spend plenty to upgrade it, etc., but still).

In hindsight buying the building was better than buying OMGPOP, but all you have to do is look at the P/E ratio a REIT stock trades at and what a "whatever Zynga is" trades at to know that it was a stupid decision. Basically Zynga said to its shareholders "ok, you just bought shares in a company that should generate X return but we're going to invest your new capital in something that we know will generate well below X." Dumb.

Posted by: DB73 at October 5, 2012 4:29 PM

THE GOOD?
The average rank-and-file LinkedIn employee holds stock options valued at $922,000, versus $310,000 at the time of the IPO.
The average nonexecutive Facebook employee remains enviably flush, holding stock or stock options valued at an average of roughly $2.5 million as of Friday.

THE BAD?
At Internet-radio service Pandora Media Inc., employees hold an average of $530,000 in equity, down 41% from $896,000 at the time of its June 2011 IPO.
THE UGLY?
The drop has left [Zygna] nonexecutives there holding equity valued at an average of $132,000, down 79% from $635,000 at the time of its December 2011 IPO.
Courtesy of WSJ

Oh, and let's not forget how this affects the RE market:
Nicholas Tarantola, a Realtor with Zephyr Real Estate in San Francisco, said activity has slowed over the past month, with homes that might have received 10 offers now getting five or six. "We've been whispering about [the sales slowdown] in the office," said Mr. Tarantola, who says he's not yet sure of the reasons.

Posted by: EBGuy at October 5, 2012 4:47 PM

$1.76 billion in market cap only accounts for the company's Class A shares outstanding (464.3MM shares). The company also has B and C stock totaling (517MM shares).

taking today's close price of $2.48/share, that's ~$2.4B in market cap. ZNGA has $100MM in LT debt, so using the article's cash number of $1.5B, it has net debt of $1.4B, resulting in firm value = $1.0B -- 4.5x the cost of their building.

ZNGA B and C shares are not publicly traded, but can be converted to A shares at any time -- and most certainly will convert if the company went through a change-of-control scenario (e.g. being bought out). by ignoring those two classes of shares, the article is leaving out roughly half of the company's value.

[Editor's Note: See comment below.]

Posted by: some dude at October 5, 2012 4:50 PM

TMoD and others: I think you guys have it exactly reversed. Having a market cap of $1.76B and an enterprise value of $223M means that ZNGA is trading for roughly 8 times its book value. So this would be a sell signal, if you followed a value investing approach.

Posted by: Po Hill Jeff at October 7, 2012 8:36 AM

"$1.76 billion in market cap only accounts for the company's Class A shares outstanding (464.3MM shares). The company also has B and C stock totaling (517MM shares)."

From their 10-Q:

As of July 13, 2012, there were 464,327,754 shares of the Registrant’s Class A common stock outstanding, 274,786,764 shares of the Registrant’s Class B common stock outstanding and 20,517,472 shares of the Registrant’s Class C common stock outstanding.

Add those numbers and plug in the share price of $2.32 the editor was using and you get a market cap of $1.76 billion.

Posted by: anonanon at October 7, 2012 7:05 PM

Pincus is a former investment banker, so he knows how to milk people for his own personal gain. Only in this case, the "muppets" are his employees, not the share holders.

Though I would imagine that some of his later investors are feeling the pain as well.

Posted by: NoeValleyJim at October 7, 2012 11:56 PM

…all you have to do is look at the P/E ratio a REIT stock trades at and what a "whatever Zynga is" trades at to know that it was a stupid decision. Basically Zynga said to its shareholders "ok, you just bought shares in a company that should generate X return but we're going to invest your new capital in something that we know will generate well below X." Dumb.

Interesting perspective. And on a certain level, a compelling argument.

My response is that, were I CFO at Zynga, I'd be concerned primarily with investing supplied capital the best way I know how, and given the circumstances that Zynga is operating under. If that means that I have to ignore some potential return that a given investor could have earned somewhere else on the same money, so be it if the decision to invest in a different way improves my company's financial position and/or reduces fixed costs.

My investors (that is, investors in Zynga) are buying into an operating company, not a hedge fund. They're not buying shares in something like Berkshire Hathaway, either.

It's not the CFO's job to be concerned with the fact that the P/E ratio of the average REIT stock is currently about ten points higher than the average video game company's stock. Buyers of ZNGA shares know that before they buy, if they don't, then my attitude would be "that's their problem".

Looks like another company in the tech space (well, depending on your point of view about "tech companies") agree that avoiding paying rent is a pretty good decision given the current financial environment. From the L.A. Times, Amazon.com to buy its Seattle campus for $1.16 billion:

Amazon.com has agreed to pay $1.16 billion to purchase its Seattle campus, the company announced in a government filing.

The online retailer said it has made a non-refundable $23 million deposit for its 11-building headquarters, which the company had been leasing.

…Amazon's $1.16 billion purchase of the campus makes the deal the most expensive acquisition of a single office property in the U.S. this year, according to Bloomberg News, which cited Real Capital Analytics Inc.

Emphasis mine.

Granted, Amazon's P/E ratio's been rising from about 50 to a crazy-high 300+ last time I looked at it, so the CFO there wouldn't have to justify the same lack of concern for potential returns elsewhere, if they gave that any thought at all. But they're still eliminating the downsides of leasing.

In case it's not obvious, I'm going on outsider/layman understanding of these issues and so I could be completely wrong. If so that's probably one of the many, many reasons I'm not CFO at either Zynga or Amazon.com.

Posted by: Brahma (incensed renter) at October 8, 2012 1:30 PM

Yeah, if you want a brief idea on Pincus' ethics, check out the wikipedia entry on Zynga and read "Scam Ads" and "Corporate Culture."

http://en.wikipedia.org/wiki/Zynga

And if you want more opinionated pieces out there, they aren't hard to find.

Pincus is not a good guy to put it mildly.

Posted by: nanon at October 9, 2012 3:03 PM

znga is a pig or now it's pork.

forget about pincus. why does everyone take it so personally? even though the thing is now pork, give the guy some credit for building and taking advantage of such a pig!

lol

Posted by: johnny at October 9, 2012 4:51 PM

On the last thread, bossmillion wrote:

I bought 15K of ZNGA at $6 as a pure gamble play, no pun intended.

The company is lobbying for the legalization of gaming within their apps and online offerings.

Don't think that this tactic's going to succeed if the latest news is accurate.

From slate.com tech columnist Farhad Manjoo's piece yesterday:

During the last few months, the company has lost its chief creative officer, chief operating officer, marketing chief, the general manager of CityVille, and the creators of Words With Friends. This week Laurence Toney, the former manager of Zynga Poker, also quit. That doesn’t bode well for Zynga’s last best hope—gambling. The company is launching a “real-money” version of its poker game outside the United States next year, and it’s also pushing for a federal law to legalize online gambling in this country. But if it can’t stop its top employees from departing in the meantime, it might not get that payoff.
Emphasis mine.

Now, I think that a lot of the time tech journalists overstate the impact of specific product managers on whether or not a product succeeds in the marketplace. But in this case, the departure of the Zynga Poker manager is just the latest in a fairly long line of high-profile defections, so I think the cumulative effect is going to hurt Zynga in a real way.

Posted by: Brahma (incensed renter) at October 10, 2012 10:20 AM

Perhaps they can become a REIT by putting some cots in the cubes.

Posted by: EBGuy at October 12, 2012 10:49 AM

Reminds me of a dot-bomb era optical networking company called Sycamore Networks. The founders cashed out $800M in an IPO and then shut down the company and pocketed the money "until the economy improves" (it never did). I remember meeting with one of the founders of that company in a huge office building, completely empty, where the four remaining "employees" were holed up on the second floor with one shared assistant...

I always remember leaving that meeting thinking to myself that Desh Deshpande is a genius.

Posted by: Jimmy (No Longer Bitter) at October 12, 2012 2:28 PM

From latimes.com entertainment reporter Ben Fritz back on the 5th, Zynga stock plummets below value of its cash and real estate:

How low can Zynga's stock go? Below the total value of the cash it has on hand, the securities it owns, and the amount it paid in March for its San Francisco headquarters, according to J.P. Morgan analyst Doug Anmuth.

Combined, those assets are worth $2.46 per share, Anmuth wrote in a report released Thursday night. In afternoon trading Friday, Zynga stock was at $2.35, meaning Wall Street is valuing the social and mobile game company's business at, essentially, nothing.

Sterne Agee analyst Arvind Bhatia said he expects to see "significant" layoffs in the coming months. "The magnitude of the guidance reduction was surprising and indicated the extent business has deteriorated," he wrote.

Wedbush Morgan analyst Michael Pachter lowered his price target for Zynga's stock from from $7 to $4 a share. Which does, at least, value its video game business at something.

As of earlier today, ZNGA is trading at about $2.50 per share, or 1.6% above the J.P. Morgan analyst's valuation.

I don't know what the time frame was for the Wedbush Morgan analyst's $7 to $4 price target…anybody who bought some way-out-of-the-money options in Feb/Mar of this year when it was over $15 is sitting pretty right about now.

As it is, I can't see it going much below the approx. $2.21 it was at the first week of this month.

Posted by: Brahma (incensed renter) at October 16, 2012 1:59 PM

Zynga cutting 520 jobs, 18% of workforce. Anybody know how many of the cuts are in SF?

Posted by: CH at June 3, 2013 1:10 PM

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