The case for taking Zynga private by Leena Rao and Erin Griffithjuly 31
The case for taking Zynga private by Leena Rao and Erin Griffith, July 31, 2015, explores the strategic dilemma faced by Zynga, a prominent social and mobile gaming company, regarding its public versus private status. Zynga, founded in 2007 by Mark Pincus, experienced significant financial challenges, including declining revenues, widening losses, and management issues. After Pincus’s return to the company in 2015 to initiate a turnaround, questions arose about whether the company should remain publicly listed or should pursue privatization to facilitate restructuring without the pressures of public markets.
Zynga's financial position at the time reveals substantial cash reserves ($1.1 billion), real estate holdings valued at approximately $228 million, and revenues nearing $700 million. Despite these assets, the company's market capitalization was only about $2.26 billion, indicating investor skepticism and undervaluation. Analysts and industry observers debated whether Zynga's public listing was justified, given its stable cash and assets but limited growth and profitability. Some believed the company did not need public funding to operate and that privatization could provide strategic flexibility needed for a comprehensive turnaround.
Several potential takeover bids surfaced from different investor groups, including former Facebook executive Chamath Palihapitiya and an incubator named Science Inc. These bids aimed at acquiring Zynga or taking it private, often proposing strategies such as "cash extraction"—selling assets like real estate, outsourcing labor, and focusing on acquisitions rather than developing new games in-house. These approaches prioritized immediate profitability over long-term innovation but faced challenges due to timing, as the departure and return of CEO Mark Pincus altered strategic plans.
Under previous management, Zynga had struggled to transition from Facebook-based gaming to mobile platforms. Its revenues shrank dramatically from $1.28 billion in 2012 to $690 million in 2014, with net losses widening and costs increasing. Efforts by former CEO Don Mattrick to pivot the company towards mobile gaming failed to produce significant hits, and competitors like King Digital and Supercell gained market share, exacerbating Zynga’s decline. The company's bloated workforce, exceeding 2,000 employees, contrasted sharply with more-efficient competitors, questioning the sustainability and efficiency of its operations.
In response, Mark Pincus aimed to streamline operations, including shutting down data centers, reducing
costs by $100 million, and laying off staff—around 364 employees, representing an 18% reduction. Despite these efforts, analysts argued that Zynga needed more aggressive cost cuts and innovation to compete effectively. Industry leaders emphasized the importance of creating hit games to restore growth and shareholder confidence, prompting the question whether Zynga’s best course was to remain public or embrace privatization, allowing it to innovate away from market scrutiny.
Strategically, Zynga faced two primary paths: The "Dell route," involving selling to private investors for an extensive restructuring period, or the "Electronic Arts approach," making large bets on developing potential blockbuster games. Pincus appeared inclined toward the latter, focusing on innovation and building new gaming franchises, despite the likelihood of alienating short-term investors and risking further financial instability. His majority control over Zynga’s stock meant that any strategic shift toward privatization would require his approval, making the debate about the company's future particularly complex.
Applying strategic analysis models, Zynga’s environment includes technological advancements in mobile gaming, competitive pressures from industry players, and shifting consumer preferences. Its SWOT analysis highlights opportunities in mobile gaming market growth, potential for cost leadership, and innovation, balanced against threats from entrenched competitors and declining user engagement. The company’s current strategy—cost reduction and seeking hit games—aligns with repositioning for growth but requires significant execution risks and resource investment.
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Assessing Zynga’s strategic position and the broader industry environment underscores the critical decision of whether to remain a public company or pursue privatization. The mobile gaming industry is characterized by rapid technological evolution, high competitive rivalry, and significant innovation demands, which influence Zynga’s strategic options significantly (Porter, 1980). The industry’s structure, dominated by a handful of large competitors like King, Supercell, and Electronic Arts, intensifies rivalry, leading to a challenging environment for Zynga (Gordon & DiBartolomeo, 2018).
Having a clear understanding of Zynga’s current strategy reveals a focus on streamlining operations, cutting costs, and attempting to develop new blockbuster games to restore revenue growth. Its distinctive competence lies in its established user base and knowledge of social gaming, but its execution has lagged due to internal inefficiencies and market shifts. Its positioning—aiming to innovate in mobile
gaming—competes directly with more agile competitors that harness cutting-edge technology and market insights. In this context, Zynga's strategic choices must consider resource allocation, innovation capacity, and market entry barriers.
Using SWOT analysis, opportunities include expanding mobile gaming reach, leveraging data analytics for personalized gaming, and acquiring smaller developers to bolster game portfolios. Threats involve intense competition, rapid technology changes, user fatigue, and the possibility of declining engagement with existing titles (Kim & Mauborgne, 2004). The company’s internal weaknesses—high costs, inefficient workforce, and lack of proprietary hit games—further limit agility and profitability.
Identifying strategic options, Zynga could either pursue private ownership to facilitate long-term innovation without short-term earnings pressures or continue as a public entity to access capital markets for large investments. The privatization route offers advantages such as operational flexibility, reduced market scrutiny, and a focus on innovation. Conversely, remaining public provides access to funding but exposes Zynga to relentless performance pressures that may hinder risk-taking efforts essential for breakthrough growth (Groeppel, 2010).
Criteria for evaluating strategies include the potential to restore revenue growth, reduce operational costs, strengthen competitive positioning, and enhance shareholder value. Quantitative assessments weigh projected cost savings against the revenues from new game launches and market share expansion. Qualitative factors involve management’s capacity to innovate, investor relations, and stakeholder perceptions.
Considering the benefits and costs, privatization appears favorable for Zynga’s turnaround, providing the strategic environment necessary for risky innovation. Sell-offs of real estate assets, cost cuts, and internal restructuring could create a leaner organization better equipped for innovation. However, drawbacks include the loss of access to public capital and potential challenges in securing private funding. Continued public listing might provide ongoing capital but could limit the company's agility in executing transformational strategies.
The optimal decision thus hinges on prioritizing innovation and long-term growth over short-term market pressures. If Zynga can secure sufficient private funding and execute its strategic plan effectively, privatization offers a pathway to revitalization. This would involve a structured process—valuing assets, negotiating with potential buyers, and ensuring management retains strategic control—aligned with
shareholder interests and stakeholder ethics.
Implementing this decision requires a comprehensive plan: engaging private investors, restructuring operations, fostering a culture of innovation, and launching new gaming franchises. Monitoring outcomes involves measuring revenue growth, user engagement, market share, and financial performance against set targets. Continuous reassessment ensures the strategy adapts to technological and industry changes, maximizing the potential for Zynga’s revival and enhancing shareholder value (Grant, 2019).
References
Gordon, B. R., & DiBartolomeo, D. (2018). Competitive strategy in mobile gaming. Journal of Strategic Marketing, 26(4), 329–341.
Groeppel, D. (2010). Strategic options for public companies. Harvard Business Review, 88(11), 72–80.
Grant, R. M. (2019). Contemporary Strategy Analysis (10th ed.). Wiley.
Kim, W. C., & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review, 82(10), 76–84.
Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.