Zynga to Put Headquarters Building in San Francisco on the Market
news.theregistrysf.com
news.theregistrysf.com
Zynga seems to be really good at the CapEx/OpEx game. Back before they went public, they did everything on Amazon, so it was all OpEx. Then they built the ZCloud, which converted OpEx to CapEx, which investors liked.
What a lot of people don't realize is that they have been slowing dismantling ZCloud and going back to AWS (converting previous CapEx to current OpEx).
If you mean the building, it's because they can take advantage of the gains and add that to their balance sheet and then slowly spend it back down.
A balance sheet balances, so every asset matches a liability. A sale like this doesn't alter the sheet, they are merely swapping one asset (a building) for another (cash).
What is affected is cash and cash flow.
The profits probably haven't been accrued in past P&L's have they?
So the amount of profit will be a credit to equity and a debit to cash, improving the leverage of the balance sheet.
But that's beside the point, any good analyst would have already adjusted their balance sheet to take account of the value of real estate.
My best guess is that they are planning a round of lay-offs and will use progressively less space in the building. I'd wager that they plan to move headcount to lower cost areas. They also view the real estate market as peaking and want to get out at the top instead o ending up with a depreciating asset. These are just my wild guesses though, no analysis to back it up.
Overall, it's a smart move.
Appreciating assets like building of course have a different affect on the P&L, but then so do the loans you take out to finance them.
Assets = Liability + Equity
Let's say my company has: 50 million in non-real estate assets (cash, IP, etc) 25 million in liabilities (loans, accounts payable, etc) 25 million in equity 50 million in a building paid by a loan (both an asset and a liability)
If I own the building: Assets (100) = Liabilities (75) + Equity (25) Equity/Liabilities = 1/3
If I sell it, pay the loan, and lease it back to myself: Assets (50) = Liabilities (25) + Equity (25) Equity/Liabilities = 1 I appear much more credit-worthy.
There may also be tax reasons for this.
For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are.
Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently)
One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan.
Accounting is more than just consistent rules followed by the green eyeshades. :-)
There are two immediate existing business opportunities:
1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work.
2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".
People think accounting is just sums -- it's not. It's the interpretation of sums. Balance sheets and P&L statements don't follow some law of nature; they are careful crafts that try to convey specific concepts about how a company views itself and how it thinks other people should view it. Like all things written by humans, these documents can lie, misdirect, and bend the truth to an agenda. It takes skills to craft them and to decipher them.
Accounting is "just sums" in the same way being a playwright is "just writing". It's a shame that formal education seems to fail at communicating this to the general public; Western society is based on capital but few people understand where and how this capital actually is.
Consider; your project managers claim to be done with 80% of a project. You've billed and been paid for 50%. One lone ranger claims the project is only 30% done. At completion, the project will require a an expensive piece of hardware from you to launch. You have three of these pieces of hardware in stock; the first two you bought cost $50k. The last one cost $150k. The market value is $100k, and the customer will pay $100k at launch.
There is no one answer as to how to book this. You have three choices for the inventory booking (FIFO, LIFO, AVCO) -- the first one will at launch book you a net profit of $50k, the second a loss of $50k, and the last one a profit $17k or so. And, you may decide to book the expense of the hardware now, depending on the contract, so it might look like an expense until you actually launch.
If you are accrual basis, you have at least two ways to book your current revenue; 80% or 30%. Depending on your internal personnel costs, that may yield a profit or a loss. Of course, if some of the project time has been spent on things that could yield benefit to the company later, you may move some of it over to an R&D budget,...
The decisions go on. They are neither trivial nor are they unlinked from reality -- answering the questions like 'did we make money on this project?' and 'how much should we sell the hardware for?' are basic questions that yield 'it depends' type answers.
So, yes, people lie on balance sheets, all the time. But, truth is often hard to achieve for even a very solid financial officer and good management team.
It isn't supposed to be ambiguous, though it sometimes is (and that's a problem). At least in Canada, we have relatively straight-forward rules to follow for allowable capital depreciation rates, as seen here:
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/c...
Also, it makes sense for most healthy companies to borrow money and pay out a stock dividend at the same time. You need to pay interest on the borrowed money. But that interest can be deduced from the taxes you'd have to pay otherwise. The trick is to find the correct ratio.
The earnings to invest ratio goes up and everyone is happy.
This particular deal makes a lot of sense, the type of investor who wants real estate is not usually the same type that is interested in a struggling tech company.
Yes they are? The reason you're thinking of the building as completely safe wrt to credit risk is that, if the company finds it can't pay the loan on the building, it can sell it and hope to pay the loan that way. But that might not work! In the second scenario, that's already been done, which eliminates the risk of being unable to sell the building for an amount that will cover the loan.
I think there is something to be said for extracting the value of the illiquid asset. Retailers like Sears and Target were valued primarily based on their real estate until real estate went South and all that was lost.
A lot of the Adobe Stuff including the Macromedia divisions when they were alive are still immediately next door or across the street. I think their use of 650 Townsend was mostly for overflow office space.
It is a mall.
If you ignore the homeless problem (which is actually in busy areas like Tenderloin), there are no real "sketchy" areas in SF. You have to cross the bay for that.
If you ignore the crime problem in crime-heavy areas, you might say that those areas have no crime problem. It doesn't mean that you're right.
EDIT: Looks like the city is going to try to clean it up: http://sfist.com/2016/02/23/division_street_tent_city_to_be_...
The merry-go-round was given to us by Apple:
http://radio-weblogs.com/0106797/picts/MacromediaFlashOffice...
I suspect that once they have the cash in the banks, activists will push them to "enhance shareholder value" with it, which is more likely share buybacks than anything else. It could still lead to an acquisition.
Unlocking the cash is nominally better than holding onto the building from a buyout perspective in that it saves the buyer the dirty work. If the buyer wants to do an LBO, they can use the cash to finance it. (Strange how that works!)
> If the buyer wants to do an LBO, they can use the cash to finance it. (Strange how that works!)
Agreed. If you can't figure out what to do with your cash, someone else with less insider knowledge and experience will. AKA they'll rebalance your books, make the tough cuts that you can't, point you in a new direction, and exit at 5-10x their initial investment in a couple of years.
[0] http://fortune.com/2015/09/30/carl-icahn-buy-apple/
Generally this turns into companies doing more dividends and share buybacks.
Leveraged takeovers are often simple cash grabs by plundering buccaneers.
If I borrow 900K to buy a million dollar business, I have only 100K invested in it. Let's say 2 years later I sell the business for 2 million... After paying back the 900K and perhaps 100k in interest I am left with 10x (1 million) of my 100k equity.
Of course if the debt kills the company, we all lose.
Is there any history of a company who wanted to sell and sweetened the pot by throwing in some corporate offices they own?
It's different than what Zynga is doing, but I'm wondering if its a viable alternative.
Retailers (Sears and Target) have historically been valued primarily on real estate.
It's not that different than Yahoo being valued primarily on their investments rather than core business.
Which is perfectly reasonable. The money belongs to the shareholders, after all. Shareholders are generally happy if their money is going toward new profitable ventures, but they don't normally tolerate big piles of money in the corporate kitty that aren't doing anything. In that case as an investor you'd rather have it disbursed somehow so you can invest it somewhere else.
They could also use it to acquire someone else, although it seems a bad time to make an acquisition.
They're going to lose out on the fact that everyone stuck on 101 headed onto the Bay Bridge has to look at their billboard, sometimes for long periods of time. It's definitely prime property that they're giving up.
It blocks all lanes of traffic until the exit, because people try to skip ahead of the line by using the far left lane until the last second. And then they try to merge in which blocks the lane. Once you get past the bridge exit, then 101 is usually clear. So frustrating.
Regarding buy vs. rent, I think at the time it made sense, if they were planning on sticking around for 5+ years, given the price per square foot they paid and the fact that they would fill up the entire space.
[1] http://www.businessinsider.com/zynga-insiders-cashed-out-jus...
This is why it pays for companies like Apple to own their headquarters.
Overbuilding the HQ is a classic sign of hubris, similar to putting your name on a stadium. (Look to Lehman and Bear Stearns for the former, Enron and 3com for the latter)
(The main difference being that real estate can even increase in value, so it is an investment as much as a cost; whereas computers invariably depreciate to 0 in the end.)
A similar analogy is also around core competence - focus on what you are good at (software vs real estate). Bathe world is littered with monuments to companies that overbuilt or overpaid.
If so, wow, very shady.