Zynga Ride Continues With Acquisition Of Mobile Gaming Company And More Layoffs

Zynga sees surge after news of acquisition and layoffs and earnings release.

Logo - Zynga

Zynga acquires NaturalMotion

Logo - NaturalMotion
NaturalMotion acquired by Zynga

Yesterday, Zynga announced that it had acquired NaturalMotion, a creator of mobile games and animation software. Zynga will pay $391 million in cash and 39.8 million shares of Zynga’s Class A Common Stock for NaturalMotion. Approximately 11.6 million of the shares will be issued to continuing employees, subject to certain vesting conditions over a three-year period. All of this is subject to extremely intricate legalese that I won’t bore you with.

To the delight of its stock analysts and new formerly NaturalMotion employees, Zynga also announced a reduction in force of approximately 314 employees, constituting approximately 15% of its workforce. Zynga will incur up to $18.5 million in total restructuring expenses as a result. It feels like only six months ago when we last discussed a Zynga downsizing.

Zynga also issued its 4Q and year end financial results. Let’s get crazy:



Change from Previous Year*


Stock Price Day After Release






Fiscal Quarter





Fiscal Year




583,862,093 shares outstanding**





$1.7 billion






Fiscal Quarter





Fiscal Year




659,687,109 shares outstanding**


$2.9 billion

*Dollars in thousands.
**Based on immediately preceding Form 10-Q

Umm, so a company with 30% less revenue in 2013 than 2012 is worth 40% more after announcing 2013 results than it was after announcing 2012 results?

Was there a silver lining? We suppose only losing $37 million in 2013 versus $209 million in 2012 is a good sign. That plus a Hail Mary acquisition and more layoffs equals a 23.6% pop in the stock price.




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Wal-Mart and Costco: The Latest Idiotic Argument About Employee Wages

Wal-Mart and Costco employee pay saga drones on following State of the Union address.



After the hair dryer-like drone of last night’s state of the union address featuring the prez praising Costco, a Facebook friend reposted one of those stupid CNN articles quoting an MIT professor.  The professor noted how Costco’s higher employee pay yields superior results to Wal-Mart.

Let’s count the ways this article gets it wrong.

First, let’s do like the article and pretend that these people and companies are in any way comparable (Numbers based on last completed fiscal year):

  1. Wal-Mart’s total revenue was $469.2 million, versus $102.9 million for Costco. Winner Wal-Mart.
  2. Wal-Mart’s margin was 3.6% versus 1.9% for Costco. Winner Wal-Mart.
  3. Who does more for employees? Wal Mart employs 1.3 million people in the U.S. alone. Costco: 184,000 worldwide.

Will Costco absorb all comers from Wal-Mart for the higher wages? How about Costco and Wendy’s combined? Wendy’s had 44,000 employees at the last fiscal year end. It looks like Wal Mart does more for over 1 million people in the U.S. alone than Costco and Wendy’s do in the entire world combined.

But, you say:

“According to Ton’s research, sales per employee at Costco were almost double those at Sam’s Club, its direct warehouse competitor owned by Wal-Mart.”

Sam’s margin was about 3.5%.  Winner:  Wal-Mart.

How is this for a moral argument:

If my child’s education, family’s medical care, retirement or other important things that cost money and are related to investments and financial planning, Costco is hurting me and Wal-Mart is helping. Wal-Mart’s rate of stock price growth is lagging Costco, but Costco is not nearly as big as Wal Mart. When growth stalls and the company matures, watch out. You will see its costs get in line with revenues quickly. Look at the volatility and ask if you would have liked to have been a Costco shareholder in March 2009 or

In addition, could something else account for Costco’s doubling of Wal Mart’s stock performance?



WMT’s dividend yield (2.5%) is more than twice that of Costco (1.1%).  WMT may be choppy, but in a much narrower range, and it pays a larger dividend in dollars per share and yield.

The people who work there are free to leave. Your disapproval of their choice of employment may raise another moral argument.

As to the impoverished workforce, Wal Mart gets dozens or hundreds of applications for every open position. Why would someone sign up to be impoverished? Furthermore, Wal Mart hires people that others (including Costco) won’t touch and provides them an entry into the workforce that is unavailable elsewhere. In addition, Wal Mart promotes from within, giving people the chance to move up the ranks and gain experience that companies value, providing for lateral movement as well. Price their labor out of the market, and they don’t go to Costco. They go unemployed.

If the MIT guy is so confident in his conclusion, he could open his own store and put Wal Mart out of business. We won’t hold our breath waiting.

Posted in Business Strategy, By the Numbers, Uncategorized | Tagged , , , , , , , | 2 Comments

SunGard to Spinoff “Availability Services” Business – Disruption From The Cloud

SunGard announced plans to spinoff its Availability Services division, much like the missing “u” in its name, as the Cloud disrupts its business.

SunGard to Spinoff Availability Services Business
SunGard to Spinoff Availability Services Business


SunGard Data Systems Inc. is of the world’s leading software and technology services companies.  They said so themselves.  Last week, SunGard announced plans to spinoff its Availability Services business on tax-free basis to its stockholders.  It plans to complete the spinoff in early 2014.

SunGard’s provides this interesting public look into an otherwise large, but private, company.

Availiability Services, or AS, is one of three SunGard segments.  It provides disaster recovery services, managed services, information availability consulting services and business continuity management software to more than 8,000 customers in North America and Europe.  So, how well does it do it for SunGard?

AS is only about one-third of SunGard’s business.  Like its much larger Financial Systems sister business, its revenue decreased by 4% from 2011 to 2012 and decreased about 2% for the third fiscal quarter from 2012 to 2013.

Does this mean SunGard is offloading a dog and trying to keep the good parts in the consolidated parent?

Maybe.  The future trends do not look good for AS.  As SunGard itself explained,

“[r]ecovery services revenue has been declining due to customers shifting from traditional backup and recovery solutions to either in-house solutions or disk-based, cloud-based or managed recovery solutions.”

This could be a problem.  However, is there a solution?

“In this environment, we have introduced the Managed Recovery Program (“MRP”), which brings SunGard’s expertise to our customers’ disaster recovery operations. Demand has also been increasing for outsourced management of IT operations and applications. We expect these trends to continue in the future.”

Well, chalk this up to the cloud, I suppose.  And SunGard’s AS division is going to go after this newfangled idea.  But, isn’t this what AS already does?

“Additionally, we provide business continuity management software and consulting services to help customers design, implement and maintain plans to protect their central business systems. To serve our more than 8,000 customers, we have approximately 5,000,000 square feet of data center and operations space at over 90 facilities in ten countries.”

Well, sort of but not really.  AS could be seen a type of cloud services provider, but its customers appear to be shifting away to more generalized cloud providers.  Are Box and Dropbox and their ilk the scourge of legacy companies like SunGard’s AS business?  Possibly. 

However, AS is moving into more consulting services and maybe it can be more nimble as a standalone.  Thanks to public reporting requirements as a result of publicly registered debt, we’ll see after the spinoff.

Posted in Business Strategy, By the Numbers, Spinoff, Uncategorized | Tagged , , , , , | Leave a comment

Crocs Trade Crocked – A Week Late, Several Dollars Short

Crocs announces Blackstone deal and CROX rallies about a week after our options expire, and we take it personally.

It has been a while since I’ve given an update on the Underdisclosed.com Fund, the little fund that could. Since inception in February, it is up over 40%, with the original capital up over 89%, as of this writing.

It has not been all fun and games, and there have been some ups and downs.

Crocs Logo
Crocs, stylish and profitable, if you’re Blackstone.  I’ve always heard the Blackstone guys dress sharp.

Today’s discussion is a downer. Let’s look at some chronology:

July 26, CROX is looking beaten up, and analysis shows room to move, particularly if they attract some institutional interest. We buy some December 21 $14 calls. It closed at $13.73, while recently trading over $16 and $17 per share. Should be a good one, right?

Early August, CROX traded over $14 for a few days. Time to put the down payment on the yacht, right? It began to slip, trading in the $12-13 range for the next few months. Uh oh.

November 27, there was news that Crocs was talking to buyout firms, including Blackstone, and the stock jumped to $13.84. The beginning of a rally? Nope. It slipped again.

December 21, our options expired worthless as the market for them faded away and we hoped for a white knight.

A mere nine days later, Crocs announces a huge deal with Blackstone, and the stock jumps over 20% to close at $16.14. Seriously, you guys couldn’t have done this 10 days ago?

The lesson:  Being right doesn’t mean you’re timely.  If we had purchased the calls with a later expiration date, it may have worked out, but they were more expensive.  In either case, we had the right idea with the wrong timing and corporate financing transactions take time to work out, even if it seems like they should occur.


Missed it by that much (*holds index finger near thumb*).



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Volcker Rule’s Victims – Zions To Reclassify, Divest CDO Portfolio

Volcker Rule, an ill-advised part of ill-advised “comprehensive reform” statute, is wielded like a blunt instrument. Dodd and Frank continue reign of terror after leaving Congress.

Zions Bancorporation announced that it believes that almost all of its CDO portfolio will be considered disallowed investments under the Volcker Rule.  For those that follow such things, Dodd-Frank was federal government response to the financial crisis.  As to whether it actually addressed the causes of the fiscal crisis, opinions vary.

Logo - Zions

Zions Bancorporation discusses impact of Volcker Rule.


The Volcker Rule, among other things, prohibits financial institutions from owning “speculative” investments and engaging in proprietary trading.

So, what does this do to banks and financial institutions?  We mean in reality, not theoretically.

Zions’ stated that it will reclassify all covered CDOs that currently are classified as “Held to Maturity” into “Available for Sale.”  Accounting mumbo jumbo.  That’s it?

“The net result would eliminate substantially all of the accumulated other comprehensive income adjustment to equity related to the covered securities.”

More accounting mumbo jumbo.  What does this really mean?

According to Zions, this results in:

  • An estimated pro forma one-time non-cash charge to earnings of $629 million, pre-tax, and $387 million, after tax
  • pro forma September 30, 2013 common equity Tier 1 ratio under Basel I rules would approximately equal 9.74%, down from the actual 10.47%
  • pro forma September 30, 2013 GAAP tangible common equity to tangible assets would approximately equal 7.84%, down from the actual 7.90%

An earnings hit and a negative impact on regulatory ratios.  Hooray progress!

But wait, there’s more.  What happens when Zions goes to sell its portfolio?

“It is unclear what impact, if any, the divestitures mandated by the Volcker Rule across the bank and insurance trust preferred CDO asset class may have on trading prices; such prices are used in determining Zions’ fair value marks. Accordingly, the actual impact of the Volcker Rule may be materially greater or less than the impact estimated above.”

In other words, the flood of bad “speculative” securities on the books of financial institutions into the marketplace will cause prices to fall.  This will obviously cause income and returns to fall, which can cause the values to fall even further.  Death spiral alert!

Zions stated that is it evaluating multiple ways or combinations of ways to comply with the Volcker Rule requirements to optimize shareholder value.  Good luck with that.

Link:  Zions press release re:  Volcker Rule

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Emulex Workforce Reduction to Ax 10% In Restructuring Plan

There’s a lot of end-of-year activity at Emulex as it announces plans to ax 10% of its employees in a workforce reduction and tries to find its way back to financial and shareholder relations health.

Logo - Emulex

Emulex announces restructuring and workforce reduction.

Earlier this week, Emulex announced that it was going to implement a restructuring.  The Emulex workforce reduction of 10% is part of the plan.  It would also include consolidation of certain engineering activities and closure of its Bolton, Massachusetts facility.  The Company said it expects to incur up to $10 million of restructuring charges.

The restructuring comes on the heels of a $175 million convertible senior note financing and the sale of about $4.7 million of common stock to (Underdisclosed.com favorite) Starboard Value in mid-November.

On November 11, 2013, Emulex seemed to get its relationship with activist investor (also an Underdisclosed.com favorite) Elliott Associates in order, which reinstated Elliott’s standstill and included agreement on the composition of the board of directors.  At the same time, Emulex announced that is Executive Chairman of the Board would be stepping down.

Based on the timing and character of the SEC filing with these announcements, it appears that these were preconditions to selling $180 million of convertibles notes and shares of common stock.  In addition, it seems to have transformed Emulex’ relationship with Elliott from activist shareholder to passive shareholder.  Elliott now discloses its holdings in, and intent for, Emulex in a Schedule 13G instead of Schedule 13D.

However, Emulex still has to deal with Starboard.

Hopefully, the governance changes and financings will help Emulex right the ship.  We’ll wait to see what year-end numbers look like.  However, in the last quarter, a $657 thousand profit in 2012 turned into a $3.6 million loss.

Posted in Activist Investor, Business Strategy, Earnings Release, Elliott Associates, Executive Changes, Hedge Funds, Private Placement, Shareholder Rights, Starboard Value | Tagged , , , , , , , , , , , , , , , | Leave a comment

Big IPO News As We Head Into 2014

Strong IPO activity as we head out of 2013 (it works both ways).

In the last two days, there have been three big IPO happenings.  Let’s take a brief look:

Hilton Worldwide

Hilton Worldwide Logo

Hilton Worldwide Goes Public, Ticker Symbol "HLT"

The most high profile of the recent IPOs was Hilton Worldwide.  It is the hotel company, in case you’ve been living under a rock and have not had to travel ever.

It is the largest of the IPOs at $2.4 billion.  However, it only priced just above the middle of the range at $20/share.

Hilton was owned by Blackstone before the IPO.  The pre-IPO ownership vehicle (Hilton Global Holdings) is distributing its shares of Hilton to its members and selling other shares into the IPO to generate cash to distribute to its members, with additional payments to be made to Hilton Worldwide.

This was the largest hotel IPO.


Autohome Logo

Autohome Goes Public, Ticker Symbol "ATHM"

In Chinese company IPO news, Autohome priced yesterday above its range at $17/share, raising about $123.6 million after underwriting discounts.  Autohome runs Chinese websites that provide information about cars to the tune of $34.8 million in net income in 2012.

At the beginning of trading, ATHM spiked to $31.44, dipped to $26.00, rallied to the low $31′s and closed at $30.07.

Telstra, the giant Australian telecom company, controls 66.2% of Autohome after the IPO.

Valero Energy Partners

Valero Energy Partners Logo

Valero Energy Partners Goes Public, Ticker Symbol "VLP"

In energy-related master limited partnership IPO news, Valero Energy Partners went public yesterday raising $324.3 million, after underwriting discounts.  It priced at $23/share, above its range.  After some volatile spikes and dips, VLP closed at $28.02/share.

The company was formed by Valero Energy Corporation, the world’s largest independent oil and gas refiner, who will also own 100% of the company’s general partner, 72.5% of the limited partnership interests and all of “incentive distribution rights,” which are rights to receive a portion of the cash distributed from the company’s “operating surplus.”




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Its Been Busy Since Thanksgiving . . .

hence, the shortage of posts lately.  We will be picking it up today (we hope!).

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Electronic Arts Online and Mobile Strategies Show How They Both Destabilize And Provide Opportunities For Game Makers

Latest SEC filing shows growth in some areas and an impact on income.   Electronic Arts’ online and mobile sectors are proving challenging to integrate into a physical game world, with impacts on business strategy and financial planning.

For regular readers, our rants on the impact of mobile devices must be getting boring.  Sure, we go on and on about it.  However, we still believe that we are witnessing a great tectonic shift in how people consume digital media.

Electronic Arts (EA) Logo

Latest SEC filing shows Electronic Arts online and mobile media challenges.

With that, let’s take a look at Electronic Arts’ latest SEC filing.

First, the opportunity.  For the latest fiscal quarter, “Wireless, Internet-derived, and advertising (digital)” (which we call “WIA”) income increased by 11% from the same period last year.  Meanwhile, “Publishing and other”(which we call “PAO”) income decreased by 10%.

Sure, PAO is about twice as large as WIA.  That is true now.  Next year?  2015?  Guess where the trend line is headed.

“Yeah,” you say.  “But as games are released and begin to burn off, this is to be expected.”  You are right, however, for the previous fiscal quarter, PAO sank by 30% while WIA gained 17%.

There is another effect with broader implications, and that is the life cycle of the games and when EA expects to get their money.  As they explain, they used to use a six-month period to defer and recognize revenues for physical games.  However, they have changed this estimated offering period to nine months due to the increased amount of time people use the online functions.  Good news, right?  People play games longer, which allows EA to make more money.  However, this has the effect of delaying recognition of revenue.

In other words, they report the revenue later and over a longer period of time.  This is why they use the Net Revenue Before Revenue Deferral metric for reporting revenues, which is expected to be about $450 million more than net revenues reported on their financial statements.

Complicated and technical, yes.  But it also shows how the online component is impacting store-bought games on a business and financial level, in addition to technical and development levels.

Posted in Business Strategy, By the Numbers, Earnings Release, Gaming, Uncategorized | Tagged , , , , , , , , , , | Leave a comment

Pandora Issues Earnings Release – Some Preliminary Thoughts

There’s some good news, some not so good news in Pandora’s latest earnings release.

Pandora issues Q3 earnings release.

Pandora has been on a pretty good run since this summer, from hanging out in the teens to hanging out around $30/share.  Good for them.

Pandora issued its earnings release yesterday, showing some positive signs and touting:

  • Pandora closes record revenue quarter, with non-GAAP revenue of $181.6 million, growing 50% year-over-year [Ed Note:  these are quarterly numbers]
  • Mobile advertising revenue exceeds $100 million, growing 58% year-over-year to $104.9 million
  • 3Q14 GAAP total revenue of $180.4 million, growing 50% year-over-year
  • 3Q14 total listener hours of 4.18 billion, growing 17% year-over-year
  • Share of total U.S. radio listening for Pandora in October 2013 was 8.06%, an increase from 6.61% at the same time last year
  • 70.9 million active users , growing 20% year-over-year

So far so good.

On the flip side, net income for the 2012 quarter of $2.1 million turned into a $1.7 million loss, while the nine month number went from a $23.6 million loss to a $38.1 million loss, showing losses increasing by 61.4%.  Losses are increasing faster than revenues, which could be a problem.

Let’s end on a positive note.  Mobile advertising revenue exceeded $100 million during the quarter.  We expect more analysis for our private clients, particularly after Pandora’s Form 10-Q.

Posted in By the Numbers, Earnings Release | Tagged , , , , , | 2 Comments