My Advice For Mark Pincus

Oct.17.12 | About: Zynga (ZNGA)

A recent blog that ultimately advised Zynga (NASDAQ:ZNGA) CEO Mark Pincus to take the company private caused a bit of a stir when it was reported that Mr. Pincus tweeted a link to the blog. The author of the blog, who comes from the gaming industry, makes a lot of good points. In particular the point about the pounding being done to this company being overblown, which I've also made, is a good one. I don't however agree with his assertion that Zynga needs to be taken private.

After already taking a 40% haircut when they announced reduced bookings guidance for 2012 with their Q2 earnings release, Zynga took a further ~20% haircut on again reduced guidance in October. Bookings were reduced from a range of $1.15B-$1.22B or $1.185B avg to $1.085B-$1.1B or $1.092B avg. So an 8% reduction in estimated bookings results in a 20% haircut for the stock and now with a market cap of ~$1.83B the company is just about trading for their net cash value (cash and marketable securities less debt) of $1.5B. I can see why the author of the blog might be frustrated with the level of hatred aimed at this struggling but not remotely close to insolvent (as implied by the market cap) company. I can also see how Mr. Pincus would be frustrated particularly at the vitriol sent his way as the stock has cratered lately.

The first argument I'll make about why Pincus should not take the company private has to do with the legality of it. Assuming it's Pincus and maybe some partners that make the offer to buy the company, even if they double the current share price and offer something like $5.00/ share; this company went public at twice that price less than a year ago and I'm sure there are a lot shareholders who bought in at much higher prices than $5.00/ share that won't be thrilled with that offer. While Pincus having 50.15% voting power can certainly force the approval of the takeover, you can bet your bottom dollar he'll face a class action lawsuit over it. I'm not a lawyer but based on the old axiom "if it were that easy everyone would do it" I'd say the plaintiffs in the class action would have a pretty good case against Pincus selling the company back to himself for half of the IPO price less than a year later.

There has been a lot of criticism made of Pincus setting himself up as King for life with his 50.15% voting power and cashing in 15.5% of his holdings to the tune of around $220M, shortly after the IPO but before they announced reduced guidance. While I agree with most of the criticism particularly with the king for life voting rights, this is one instance where these two acts might be beneficial to minority shareholders. Analyst and pundits can heap all of the vitriol they want on Zynga and Pincus and when it's all said and done Pincus isn't going anywhere and he's got enough money where he can stay focused on the long term prospects for Zynga without worrying about the current market price of his company's stock.

Contrary to the argument made in the blog, Mark Pincus tweeted he has the ability to ignore all of the noise around him regardless of how loud it is right now and concentrate on the long term. Hopefully Pincus was tweeting the link to the blog because he agreed that the market was overreacting and not because he agreed that he should take his ball and go home. I'm going to go off track a bit here and do a little bragging about my alter ego (MKArch) in the Motley Fool's CAPS stock picking competition. I've been camped out in the top 1% of the competition for the last couple of years and most of the 6 years I've been in it, mostly by making contrarian bets and being patient. I did fall to the bottom of the competition late 2008 early 2009 purposefully loading up on picks when everyone else was panicking.

While I don't mind patting myself on the back, the point I'm trying to make is not that I'm the next Warren Buffet (and I ain't) it's that the market get's it wrong a lot of the time and investors and businessmen (or women) that can distinguish when the market is just being irrational can make a boat load of money. If Mark Pincus really believes in the prospects for Zynga he can just ignore the market and do what he thinks is best for the company and shareholders because he isn't beholden to anyone. If the analysts and pundits want to criticize him he should prove them wrong by doing what's right for the long term success of the company and waiting for his chance to say he told them so.

Finally, I have some advice for Mark Pincus for the upcoming earnings release and conference call. Be as completely honest as you can and provide as much information about what's going on as you can. Don't just tell us you are optimistic about the future talk about what you've learned about monetizing rewards and what the current issues are. Talk about how you see rewards evolving. Provide as much specific information as you can. Talk about the advertising side of the business and how you see this evolving. Give us some realistic scenarios for how these segments might grow (or shrink) and provide some revenue ranges. Talk about monetizing third party developers and include realistic revenue ranges. Do the same with international expansion. Play it straight because you've got nothing to lose and no one will believe you if you don't.

Disclosure: I am long ZNGA. 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.