On Tuesday, we saw some air come out of Zynga (ZNGA) shares after speculation Monday that Yahoo! (YHOO) might buy it popped the shares by more than 10%. But expect Zynga to continue trading down in coming days and Yahoo! shares to recover. The reason: There is no basis for the rumors of a tie-up.
Zynga CEO Mark Pincus has made it clear in public and private meetings that he has no intention of ever -- ever -- selling the company. He wants the CEO job for the rest of his life and wants to build out the Zynga platform. Although Pincus is a fan of Yahoo! CEO Marissa Mayer, that doesn't mean he plans to deviate from his stated goal.
Pincus has control of Zynga; he made sure of that as part of the governance structure and with his outside investors from day one. He -- and he alone -- decides when to sell the company, not bloggers or outside pundits. What's more, why would he sell Zynga at $3 or $4 when that's well below the post-IPO high of $14? With all his hope, ambition and control, there is no reason to agree to what would effectively be a take-under at this price.
All this speculation, which has driven Zynga and Yelp (YELP) in the past week, comes from comments by Yahoo! EVP of People and Development Jackie Reses. It was odd to begin with that she made the comments, although certainly not as puzzling as Lenovo's top officers hinting publicly that they were interested in BlackBerry (BBRY). But just because Reses made these comments in no way suggests a big splashy deal is about to happen.
Yahoo! doesn't have billions in cash at its disposal. It has billions in cash that it has already earmarked for share buybacks. If Yahoo! used this cash for a big M&A deal, shareholders would likely punish the flip-flop by selling off shares.
As far as I can see, the only way a big (i.e., more than $2 billion deal) happens is as part of a cash-rich split for Yahoo!'s 35% stake in Yahoo! Japan. But even then, the deal won't be for Zynga.
In the short-term, Zynga should drop and Yahoo! should bounce back from these rumors.
