Skip to Content

Term Sheet — Friday, July 30

The case for a Zynga take-private

Hello readers – this is Erin Griffith filling in once more before Dan returns from vacation Monday. Today’s column was written by myself and my colleague Leena Rao. Find us on Twitter: @ErinGriffith and @LeenaRao.

This spring, Mark Pincus returned to Zynga, the gaming company he founded in 2007, to attempt the near-impossible: a turnaround of a consumer tech company. Pincus, you might remember, was ousted in 2013 after the company’s share price cratered from over $14 a share to under $3.

Now he’s back to save the company. But Zynga’s cheap valuation, pile of cash, and real estate holdings has plenty of investors wondering, why is he doing it in the public market?

Zynga, the argument goes, should be private.

It’s simple math: The company has $1.1 billion in cash on its balance sheet. It owns real estate worth at least $228 million. And brings in almost $700 million in revenue. But Zynga’s market cap is a paltry $2.26 billion. It hasn’t traded above $3 billion in over a year. “There is no good reason why it’s still public,” says Richard Greenfield, managing director with BTIG. “They don’t need the public’s capital to run their business.”

Indeed, at least four different groups of investors have plotted takeover bids for Zynga over the last year, according to people familiar with the situation. One group included former Facebook executive Chamath Palihaptiya in partnership with financial partners, another was spearheaded by Los Angeles-based incubator Science Inc. Those bids fell apart when Pincus returned in April. Zynga declined to comment.

At least two of the plans involved a “cash extraction” strategy, where the company’s new owners strip all of the costs from the company by selling the real estate and sending labor overseas. Growth would come through acquisitions, rather than in-house development. That strategy is less exciting, but easier and more profitable, than trying to create the next hit game from scratch.

The problem is that plan was a lot more promising four months ago, when Microsoft exec Don Mattrick was still running Zynga. He was supposed to transform the company from a primarily Facebook-based game network into a mobile games company, and he was failing. Even as gaming soared on mobile devices, Zynga struggled to produce hits for smartphones. Competitors like King and Supercell leapfrogged it. According to IDG, the mobile games market generated $17.5 billion in revenues in 2014 and will hit $27 billion in the next five years.

Under Mattrick, Zynga’s annual revenue shrank from $1.28 billion in 2012 to $690 million in 2014. Net losses widened from $209 million in 2012 to $225 million in 2014.

Costs increased as the company overpaid its executives and spent $100 million building its own data centers. Even as shares plummeted under Mattrick’s leadership, Zynga’s board approved a $57.8 million compensation package for him in 2014.

But Zynga’s biggest drain on costs came from its bloated headcount. Zynga employs 2,000 workers to earn $690 million in revenue. Contrast that with Supercell, which employs 150 people and last year earned $1.7 billion with $565 million in profits.

Seeing these potential efficiencies, Palihapitiya and his consortium prepared a tender offer for Zynga. But they were too late. Pincus had already planned his return to replace Mattrick.

In the last four months, Pincus has addressed some of the problems mentioned above. In May, Zynga shut down the data centers, moving its games to Amazon’s cloud computing platform. Pincus also announced he would cut $100 million in costs, laying off 18% of the staff, or 364 people.

But Zynga needs to do a lot more if it wants to compete with Supercell and revive its dismal stock price. Analysts have called for more job cuts. Beyond that, Zynga needs to somehow create new hit games. The question is whether it would be better off doing that as a private company.

Zynga has two options: There’s the Dell route of selling to a private investor to complete its turnaround behind closed doors.

Or there is the EA route, where Zynga makes big financial bets on building potential mega-hits. That’s the direction Pincus appears to be taking now. “He doesn’t want to run a non-innovative tech company that just throws off money,” one observer says. “He wants to build new stuff.”

That attitude may thwart any potential buyout. After all, no deal can happen without Pincus’ approval – he owns majority of the voting power of Zynga’s stock.

THE BIG DEAL

SunGard, a financial software company, is in talks to sell itself to Fidelity National Information Services for as much as $8 billion, according to Bloomberg. SunGard’s was acquired by Bain Capital, Blackstone Group, Goldman Sachs, KKR, Providence Equity Partners, Silver Lake and TPG Capital  in 2005 for almost $11 billion. The company The filed to go public last month. Read more.

VENTURE CAPITAL DEALS

Truecaller, a Stockholm-based caller ID company, is raising $100 million at a $1 billion valuation, according to TechCrunch. Read more.

Catawiki, an Amsterdam-based online auction startup, has raised  $82 million in Series C funding led by Lead Edge Capital with participation from existing investors Accel and Project A Ventures. www.catawiki.com/

PicMonkey, a Seattle, Wash.-based photo editing service, raised $41 million in funding from Spectrum Equity. www.picmonkey.com/

InsideView, a San Francisco-based big data startup, raised $32.5 million in funding led by Spring Lake Equity Partners with participation from Big Sky Partners, Foundation Capital, Rembrandt Venture Partners and Split Rock Partners. www.insideview.com/

Thrive Market, a Los Angeles-based healthy food startup, has raised $30 million in Series A funding led by Greycroft Partners and e.Ventures. Scripps Network participated along with angel investors. thrivemarket.com/

Integral Ad Science, a New York-based advertising technology company, raised $27 million in a new round of funding led by Sapphire Ventures. In addition, the company raised $40 million in debt from Silicon Valley Bank. integralads.com/

Iwoca, a UK-based small business credit provider, raised $20 million from CommerzVentures, venture capital arm of bank German bank Commerzbank, as well as Acton Capital Partners and Redline Capital. www.iwoca.co.uk/

TytoCare, an Israel-based healthcare technology company, has raised $11 million in Series B funding led by Cambia Health Solutions. tytocare.com/

Occipital, a Boulder-based computer vision company, has raised $13 million in Series B funding from Intel Capital, Shea Ventures, Grishin Robotics and existing investor Foundry Group.  occipital.com/

WEVR, a Los Angeles-based virtual reality platform company, has raised $10 million from HTC in exchange for a 15% stake. wevr.com/

GoButler, a New York-based concierge service startup, raised $8 million in Series A funding led by General Catalyst Partners with participation from Lakestar, Rocket Internet’s Global Founders Capital, Slow Ventures, BoxGroup, Ashton Kutcher & Guy Oseary’s Sound Ventures and Cherry Ventures. www.gobutlernow.com/

SlamData, the Boulder-based developer of the SlamData open source project,raised $3.6 million in seed funding led by True Ventures. slamdata.com/

Vaniday, a Berlin-based online beauty commerce company has raised an undisclosed amount of investment from Rocket Internet. www.vaniday.com

Autopilot, a San Francisco-based marketing platform, raised $7 million in venture funding from Salesforce Ventures, Stage One Capital, Blackbird Ventures, Garnett Ventures, Rembrandt Venture Partners, Southern Cross Venture Partners and Tim Draper. autopilothq.com/

Immune Pharmaceuticals, a New York-based biotech company, has secured commitments to raise as much as $21.5 million through two financing rounds. The first is from Hercules Technology Growth Capital. The second will come from mutual fund Discover Growth Fund. www.immunepharmaceuticals.com

•  Olio Devices, a San Francisco-based smart watch company, has raised $10 million in Series A funding led by New Enterprise Associateswww.oliodevices.com/

FreedomPop, a Los Angeles-based provider of telecom services, has raised $10 million in funding from Axiata Group. www.freedompop.com/

PRIVATE EQUITY DEALS

PartnerRe Ltd, a reinsurance company, has said it is willing to negotiate a potential deal to merge with Exor SpA, its competitor, according to Reuters. The company had previously agreed to merge with private equity firm  Axis Capital Holdings for $6.6 billion. Read more.

NCA Group Inc., an insurance claims company based in Fishers, Ind., has agreed to sell itself to Worley Claims Services, a portfolio company of Aquiline Capital Partners. www.ncagroup.com/

First River Energy LLC, a Denver-based crude oil midstream company, will acquire Texas Gathering LLC, a crude oil marketing and logistics company. First River is backed by Platte River Equity, which is providing a follow-on investment in the company to facilitate the deal. www.FirstRiverEnergy.com

Bradley-Morris Inc., a Kennesaw, Ga.-based military job placement firm, has sold to Thompson Street Capital Partners. The company was previously owned by Pine Tree Equity Partners LLC. www.bradley-morris.com/

JBF Group, a publicly traded Mumbai, India-based manufacturer, sold a 20% stake to KKR for $150 million. www.jbfindia.com

Poplar Capital Partners has acquired Productive Access Inc., a Yorba Linda, Calif.-based company which makes a survey analysis tool called mTAB, for an undisclosed amount. www.mtabsurveyanalysis.com/

IPOs

Soulcycle, a New York-based fitness chain, has filed to go public. The chain generated $112 million in annual sales last year, with $25.3 million in net income from $7.6 million two years earlier. Read more.

EXITS

• PAI Partners has agreed to sell Swissport International, a Zurich-based airport cargo and ground services provider, to HNA Group of China, the parent company of Hainan Airlines of China, for approximately $2.8 billion. www.swissport.com/

Conifer Securities, the prime services division of Carlyle Group’s Conifer Financial Services LLC, will sell to Cowen Group, for an undisclosed amount. www.conifer.com/

Blue Coat Systems Inc., a Sunnyvale-, Calif.-based security software company owned by Bain Capital, has acquired Perspecsys Inc. for an undisclosed amount from Intel Capital, Paladin Capital and Ascent Venture Partners. www.bluecoat.com/

Chime Communications, a London-based marketing firm, has agreed to sell to Providence Equity Partners and existing investor WPP for approximately $576.8 million in cash. chimeplc.com/

Berry Plastics Group, a publicly traded plastic packaging products maker, plans to acquire Avintiv, previously known as PGI Specialty Materials, for approximately $2.45 billion, from Blackstone Group. PGI had filed for an IPO in February. www.avintiv.com/

SunOpta, a Canadian organic food company, announced plans to acquire Sunrise Growers, an organic frozen fruit supplier from Paine & Partners for approximately $450 million. www.sunrisegrowers.com/

Waltz Sheridan Crawford Insurance, Forest Grove, Ore.-based insurance agency, sold to AssuredPartners Inc., a portfolio company of GTCR. www.wscinsurance.com/

FIRMS & FUNDS

Foundry Group, a Boulder-based venture capital firm, has raised a new fund, called Foundry Venture Capital 2016, with $225 million in commitments. Read more.

MOVING IN, UP, ON & OUT

Eric Medow has joined Lazard as a managing director and co-head of global technology, media and telecommunications, financial advisory. Medow was previousy head of the global telecommunications Group at Citigroup. http://www.lazard.com/

Share today’s Term Sheet:
http://fortune.com/newsletter/termsheet