Why Zynga Is Not A Good Acquisition Target For Yahoo: 5 Fundamental Reasons

| About: Zynga (ZNGA)

Zynga (NASDAQ:ZNGA) is a leading provider of social game services with 240M average monthly active users over 175 countries. ZNGA was up 10.11% and closed at $3.93 on March 11, 2013. ZNGA had been trading in the range of $2.09-$14.48 in the past 52 weeks. ZNGA has a market cap of $3.08B. Since my last article of "Zynga: Ready For Real-Money Games And Improving On The Cost Side," ZNGA had gained 38.38% with recent positive developments on online gambling and a buyout rumor.

On March 11, 2013, Wunderlich Securities analyst Blake Harper said that while last week's speculation about Yahoo (NASDAQ:YHOO) acquisitions focused on the reviews site Yelp Inc. (NYSE:YELP) and reservations service OpenTable Inc. (NASDAQ:OPEN), Zynga could make sense as a target, along with companies like the blogging service Tumblr and location app FourSquare. Harper further indicated that Yelp is the most attractive candidate as its market capitalization is half that of Zynga, where larger deals would be discouraged by Yahoo's shareholders who want the company to focus on improving its core business.

There are 5 key fundamental reasons that make this buyout unlikely:

  1. ZNGA is increasing share buyback plan. In October, 2012, ZNGA had announced $200M share buyback plan, which means the management believes ZNGA's share price is undervalued.
  2. ZNGA is playing real-money now. ZNGA had partnered with British company bwin.party to offer online real-money gambling in late October, 2012, and started to run real-money gambling games in Nevada since late 2012.
  3. Marissa Mayer is about focusing, not diversifying. According to an article from the Wall Street Journal, Marissa Mayer stated, "It's searches on the Internet, checking finance, doing your email. All of those are things I'd classify them as daily habits. At Yahoo, there's about a dozen or so, those are what we're focusing on." Yahoo may be interested in the mobile end, but gaming end may not be Yahoo's priority.
  4. There is no reason for ZNGA to leave Facebook (NASDAQ:FB) and join Yahoo. In late November, 2012, ZNGA and Facebook loosened terms of longstanding alliance. Therefore, ZNGA can develop and market its games to the world outside of Facebook. It will not make logical sense for ZNGA to be bound again by Yahoo while it redefines its focus and expands into multiple platforms.
  5. Marissa Mayer and Mark Pincus are two dominant leaders, and they do not share the same view on games.

Bottom Line

Although the buyout is unlikely, ZNGA's strong cash position ($1.28B total cash and $100M total debt) and low P/B of 1.5 make it an attractive buy at current valuation with improving fundamentals. A little bit of positive imagination will help ZNGA boost its price as the company continues to transform. With or without the buyout deal, ZNGA continues to be a good turn-around story.

Note: All prices are quoted from the closing of March 11, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions. ZNGA is not suitable for conservative investors.

Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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