Yahoo! (NASDAQ:YHOO) might be exploring a buyout of Zynga (NASDAQ:ZNGA), according to a report from Bloomberg, and Wall Street is taking the rumor seriously. Zynga shares had gained 10% by Monday afternoon, and volume was sitting at 62 million compared to a daily average of 46 million.
A buyout makes some sense here — Yahoo! has to find a way to get a piece of the social media market, and the company does have a long history of success with entertainment assets.
Also, Yahoo! CEO Marissa Mayer has indicated that she is looking to pull off transformative acquisitions, and she likes properties that are essentially “daily activities.” Gaming certainly would fit the bill.
However, there’s one small hitch — Zynga CEO Mark Pincus, who very much thinks of Zynga as a company that’s built to last.
Here’s what he wrote to shareholders in the IPO prospectus:
“To put the play macro in perspective, games have become the second most popular internet activity based on time spent, and have even surpassed email. We’ve turned our rapidly growing base of smartphones and tablets into play devices. In fact, games are now the most popular category of apps on smartphones and represent nearly half of the time spent.
“Our strategy from the beginning has been to build the biggest macro bet on social gaming to provide our players with the most accessible, social and fun games. Despite our rapid growth, we have been careful to build for the long term. I’ve always thought of this journey as being a series of sprints that make up a marathon.”
It’s glowing language.
Zynga has had its share of troubles over he past year. The company’s transition to mobile has been far from smooth, and Zynga also made a bad bet when it plunked down $180 million for OMGPop — a deal that came literally at the peak of Words with Friends’ popularity.
Still, Zynga remains a top operator in the gaming business, and it has the resources to invest heavily in mobile technology.
It also has a nice opportunity to capitalize on real-money gambling. Zynga has formed a relationship with major British provider Bwin.Party Digital Entertainment, and in the U.S., Nevada and New Jersey just legalized online gambling. The advantage for Zynga is that it has the most popular gambling franchise in the world, Zynga Poker, with a whopping 26.4 million active users, according to AppData.
It’s hard not to salivate over thinking about the possibilities if just a mere 10% or even 5% of that user base started to place actual bets, and BMO analyst Edward Williams believes the opportunity could reach into the “billions.” (Though converting Zynga Poker to online-gambling readiness and getting the system to comply with regulators isn’t necessarily a simple switch.)
Also, Zynga’s shares are still trading at a low valuation — at just 1 times enterprise-value-to-sales — and are off 60% from the IPO price.
In light of all this, it seems unlikely that Pincus would be willing to sell right now, if ever. If he did want to make a deal, he’d probably at least want to wait for his company’s growth to get back on track — and for the stock to progress much higher from current levels — before pulling the trigger.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.