The Deal: Stagnating Zynga Lowers Borrowing Limit

NEW YORK ( The Deal) - Zynga ( ZNGA), the online and mobile gaming company behind popular titles such as Farmville and Words With Friends, has quietly lowered the borrowing limit on its revolving credit facility to $200 million from $1 billion, signaling that it's not likely to make acquisitions to rev up its stagnating business.

San Francisco-based Zynga raised a big red flag when it laid off 18% of its workforce, or about 520 employees, on June 3. Now, according to a June 24 filing with the Securities and Exchange Commission, the company has amped up its cost-cutting program by reducing the borrowing limit on its revolver.

Lowering the borrowing limit will save Zynga money, since the company has to pay quarterly fees related to the untapped borrowing capacity on the credit facility. Zynga said no loans have been made under the credit agreement.

The original loan, issued on July 20, 2011, by lenders Morgan Stanley ( ZNGA), Goldman Sachs ( GS), Bank of America ( BAC) and JPMorgan ( JPM), came at a more optimistic time.

Back then, Zynga was reportedly considering a bid for PC and mobile game developer PopCap Games Inc., which was acquired by Redwood City, Calif.-based Electronic Arts Inc. ( EA) in a July 12, 2011, deal worth up to $1.3 billion.

Since then, Zynga has made smaller acquisitions. The company bought fellow game developer OMGpop Inc., which makes the mobile game, Draw Something, for about $200 million on March 21, 2012. That acquisition, however, didn't help Zynga grow its business.

In fact, among the layoffs Zynga announced were OMGpop workers in New York City. Zynga still has the Draw Something game, but it no longer has the hope of another blockbuster game coming out of that office, which is now closed.

According to Rob Enderle, principal analyst at San Jose, Calif.-based Enderle Group, Zynga has about 12 to 18 months to find a viable business strategy -- and it won't be easy. Enderle said in a Tuesday phone interview that Zynga's reliance on Facebook Inc. ( FB) as the main platform for marketing and distributing games is a big problem.

"They've hit the Facebook iceberg, and they haven't figured out how to recover," Enderle said, referring to Zynga's loss of market share on Facebook.com. "They have to develop more business outside of Facebook."

Zynga is expanding its offerings for mobile devices, but it's difficult to make money in that space because the barriers to entry are so low.Zynga said in its report for the first quarter of 2013 that Facebook is still the main platform for its marketing and distribution of games. It is trying to capitalize on the success of Words With Friends, which is popular on mobile phones, with its new offering, Running With Friends. However, the competition is stiff.

According to data researcher AppData, King.com has surpassed Zynga as the app developer with the most daily active users on Facebook. King makes games such as Candy Crush Saga, Pet Rescue Saga and Farm Heroes Saga.

When it comes to Zynga's former acquisitive strategy, Enderle thinks those days are over unless Zynga returns to health on its own. "It's hard to acquire yourself out of a problem like this," Enderle said.For one thing, Zynga wouldn't be able to compete for the best properties with larger players such as Electronic Arts and Sunnyvale, Calif.-based Yahoo! ( YHOO). For another, Zynga has a bad track record since it failed to make the OMGpop acquisition work.The company has enough cash to carry it through the next 12 to 18 months, but something needs to change if Zynga is going to survive beyond that timeframe, Enderle said.

If Zynga fails to develop a new blockbuster game, its M&A options as a seller would also be limited. As Enderle points out, Zynga doesn't have a lot of valuable intellectual property, and it's hard to guarantee that talent will sit out an acquisition.

" An acquirer wouldn't be buying much more than the buildings and the furniture," Enderle said.

Morgan Stanley downgraded Zynga to underweight in a June 21 report, citing the gamer's loss of market share and uncertain prospects for future growth.

"Zynga's updated guidance and 18% workforce reduction in early June indicate that its transition may take longer and cut deeper than we thought just a few months ago," the report said.

Still, a new gaming franchise could save the company, Morgan Stanley said. "Zynga could outperform our estimates if it catches lightning in a bottle in the form of a breakout mobile hit," according to the report.

Zynga executives couldn't be reached for comment.

Zynga is also known for its Dec. 16, 2011, initial public offering, which was seen as a harbinger for other social media companies that hoped to go public. The IPO failed to meet expectations, pricing at $10 per share to raise $1 billion. Zynga is listed on Nasdaq under the symbol ZNGA. Its shares were trading at $2.76 midday Tuesday, giving it a market capitalization of $2.2 billion.

Written by Lisa Allen in New York

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