Is Zynga Spending Too Much Money?

 

Last month, Zynga announced that they were acquiring game studio and Draw Something app creator “OMG Pop” for a whopping $180M.  Zynga paid more for this one app than they did for their past 22 aquisitions.

There is no doubt that Draw Something is a successful app and some analysts revealed that it was making up to $250,000/day, but how much staying power does it have?  Even if it made $250,000/day for the next 2 years, Zynga would still only break even on the deal.

Even though the user engagement and growth metrics for Draw Something have dropped precipitously, CEO Marc Pincus is still fine with the pricy acquisition.

In fact, Pincus recently said to Bloomberg that his company is open to doing more acquisitions in the $100M+ range.

Officer Mark Pincus expects to do “a few” deals the size of OMGPop or larger in the next three to five years, he said in an interview at the company’s San Francisco headquarters.

“We love finding great, accomplished teams that share our mission and vision,” Pincus said. “If we ever see breakout opportunities that massively accelerate social gaming at Zynga, we’ll aggressively pursue those, too.”

- Quoted from Bloomberg.com 

Even though the company has $1.8B in cash on their balance sheet, executives are Zynga ($ZNGA) went so far as to suggest that they were open to taking on debt in order to finance new deals.

Brett Cottle, a former EA Executive and Zynga’s new M&A Chief, is heading up the aggressive growth efforts at Zynga.

“We have a significant amount of cash, we have no debt, and we have access to debt to be as aggressive as we need to be”

- Brett Cottle, Zynga

So will this aggressive strategy to grow through acquisition work out for Zynga?  I always question when companies attempt to grow by buying up similar companies in their space.

The biggest risk with this approach is that you end up in a similar situation as $DELL, where you are constantly overpaying for bad acquisitions.  Not only does this approach result in draining scarce cash resources, but it also can result in shareholders being distrusting towards management.

When management teams have a history of making bad aquisitions, it tarnishes the reputation of their team and reduces the confidence of their investors.  One bad deal or a string of bad deals can ultimately sink a company.

For example, $DELL shares trade at a steep discount relative to their competition because the risk of a bad acquisition is always a large possibility.  Considering their track record of botched deals, I think it’s certainly understandable for $DELL investors to have those concerns.

Now could Zynga be going down the same path?  Potentially.

The company spent $180M on acquiring a small game studio that might not have staying power, $228M on a lavish corporate headquarters, and now they’re talking about potentially taking on debt to finance more $100M+ acquisitions.

Are Zynga’s spending habits getting out of control?  They are not quite there yet, but the red flags are certainly there.

 


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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