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3 March 2016 By Rob Cox

Nobody likes games where the rules are rigged in favor of one player. That’s almost certainly one reason why investors don’t seem very keen to put their money behind Zynga, the once high-flying video-game maker founded by Mark Pincus, who brought FarmVille to the Facebook masses.

Liquidating the $2 billion company and returning the proceeds to shareholders is probably the best option at this point. Pincus calls all the shots, though. And, having appointed its third chief executive in as many years, Zynga shows no signs of doing what’s arguably in the interest of all its shareholders.

Hackneyed and historical examples like Rupert Murdoch are no longer necessary to argue against dual-class share structures. The modern Zynga is a prime case of why it’s a bad idea to give so-called visionary founders, particularly in the fast-moving technology industry, super-voting powers.

Since going public in 2011 at $10 a share and a $7 billion valuation, it has been downhill for Zynga. FarmVille’s popularity faded and along with it the company’s stock, which trades at just $2.29 today. Along the way, however, Pincus accumulated some assets that could be of value.

The first is a pile of cash left over from the IPO. The company squandered some of the capital on dodgy acquisitions. For example, it spent $183 million for “Draw Something” developer OMGPOP, only to subsequently write down the bulk of its value. Even so, Zynga still has about $1 billion on its books.

Second, in 2012 the company purchased a snazzy 670,000-square-foot headquarters in San Francisco’s trendy Design District. It paid $228 million, or about $340 a square foot, in cash for the building, which features a funky tunnel, a basketball court, a Winnebago and games everywhere. Similar properties today sell for as much as $800 per square foot, according to The Registry, a Bay Area realty publication. On that basis, it’s worth up to $530 million.

The company has said it is putting the seven-story edifice up for sale. Even after paying capital-gains taxes that could raise some $450 million, bringing the company’s treasure chest to nearly $1.5 billion. Subtract that from the current market capitalization, and investors appear to be valuing the games business at about $500 million.

That may not sound robust. Last year, Zynga booked $765 million in revenue. Subtract the cash and after-tax value of its headquarters, and it suggests an enterprise valued at 0.65 times sales. By contrast, rival Electronic Arts, the former employer of Zynga’s new CEO Frank Gibeau, fetches around 3.8 times sales, according to Reuters Eikon.

Similarly, King Digital, maker of the Candy Crush mobile game blockbuster, sold itself last November to Activision Blizzard for $5.9 billion, or $4.8 billion net of the cash on its balance sheet. That’s an enterprise value of about 2.3 times revenue.

Zynga is no longer as sweet a prize. King Digital had reported profit for the trailing 12 months under International Financial Reporting Standards of around $600 million when Activision pounced. Though Zynga’s top line gained 11 percent in 2015, it was not profitable in conventional terms, losing $117 million, just shy of the $132 million the company booked as stock-based compensation.

Through the warped lenses that tech companies have persuaded investors to view them, however, Zynga’s prospects aren’t as bleak. Credit Suisse estimates the company will book EBITDA of around $58 million in 2016, as it launches 10 new games. At 15 times those earnings, or about one times sales, that would suggest the operating franchise is worth some $870 million.

Using those figures, Zynga’s parts are worth about 15 percent more than the whole today. It suggests the logical thing to do would be to sell the fancy headquarters and move employees someplace cheaper; then hand most of the cash back to investors, whose shares would be a pure play on Zynga’s gaming future.

That’d be the playbook for an activist investor in a normal public company. Not Zynga, though. On the way to the stock market, the firm created not one or two but rather three classes of stock.

Pincus owns a few of the A shares, which confer one vote to their third-class owners. He also owns 63 percent of the B shares, which come with seven votes apiece; and 100 percent of the C shares, each of which gets 70 votes. All told, for a 10 percent economic interest in Zynga, Pincus wields 64.4 percent of the ballot.

It was only a few years ago that investors acquiesced to Pincus, as they have done with founders at Google, Facebook and other hot Silicon Valley properties. They may have been too enthusiastic about FarmVille. Or perhaps it was the founder’s whimsical letter to shareholders. Among its core philosophies, it espoused one – “Be a CEO and own outcomes” – to which they will never really be able to hold him accountable.



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