
Zynga to Put Headquarters Building in San Francisco on the Market - coloneltcb
http://news.theregistrysf.com/zynga-to-put-headquarters-building-in-san-francisco-on-the-market/
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jedberg
A lot of people seem to be missing the fact that they plan to sell the
building and then rent it back, turning an already paid CapEx into an OpEx.

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).

~~~
et2o
What is the advantage of turning an already paid capex into an opex?

~~~
mathattack
Companies are rated on equity to liability ratios for creditworthiness.

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.

~~~
gburt
This sounds like a bug - a business is not clearly safer or less safe a credit
risk doing the movement described. Perhaps a business opportunity there.

~~~
mathattack
There are lots of accounting bugs like this. The challenge is Accounting isn't
as cut and dry as people think.

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".

~~~
forgetsusername
> _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._

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...](http://www.cra-
arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/clsss-eng.html)

~~~
mathattack
It becomes an issue if the assets themselves depreciate faster or slower than
the rules suggest.

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beamatronic
It's a neat building. It sits in the design center of San Francicso, and was
originally built as a mall. Here is some of the history.

[http://www.syserco.com/projects/zynga](http://www.syserco.com/projects/zynga)

~~~
minimaxir
The same building used to be the headquarters of Sega of America back during
their heyday. (the level design of Sonic Adventure 2 was heavily influenced by
San Francisco / Bay Area)

~~~
aYsY4dDQ2NrcNzA
Sega, CNet, Macromedia...

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SteveNuts
I'm starting to see a pattern

~~~
systems
some buildings are bad luck

~~~
jacobwcarlson
I'll take Macromedia's luck any day of the week.

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fasteddie
Anyone have an idea if this means anything other than trying to cash out an
investment before real estate prices potentially decline? Does this make them
a better/worse target as an acquisition? Or could this be generating cash so Z
could acquire someone else?

~~~
mathattack
It can help if it turns an illiquid real estate investment with a liquid
software company attached to it into a software company with a lot of cash.
There's not much they can do to unlock the real estate value other than borrow
against it which is risky.

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!)

~~~
roymurdock
Thanks for the thorough but concise summary.

> 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.

~~~
toyg
It's not turning out that way for Manchester United though. The Glazer
takeover simply burdened the club with massive debt, did not change anything
in terms of actually running the club, and nobody will ever pay 5-10x what the
Glazers did. It just enabled them to siphon money out of the club (as well as
using it as a financial dump for sketchy funds, but that's pretty common in
the football world).

Leveraged takeovers are often simple cash grabs by plundering buccaneers.

~~~
mathattack
For an LBO they don't need to be paid 10x.

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.

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mayank
> San Francisco-based Zynga is putting its San Francisco headquarters office
> property on the market for sale, according to sources that track the sale of
> office buildings in San Francisco.

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.

~~~
SilasX
Any time I'm stuck in gridlock, I just feel really frustrated and mad, and
associate negative affects with any ads I see. I can't help but think others
are the same, though I guess they still like billboards people will see during
such periods so maybe I'm different...

~~~
jonesb6
Like all the Apple bill boards in that area.. never buying an iPad ever.

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lquist
Honest question: why does a technology company own a building anyways?
Especially one that is equal to half of its market cap? Surely Zynga investors
are not interested in half of their investment being in Zynga and the other
half in SF Commercial RE?

~~~
mathattack
Part of it is timing, part cost. If you can fill a building and plan to be
there for a while, generally it pays to buy it rather than rent it. (The
renter generally charges a premium to short term borrowers) For financial
accounting/engineering purposes (not wanting to show liabilities) firms may do
long term leases.

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)

~~~
toyg
Isn't that the same as "cloud vs physical"? If you plan to use a lot of
resources consistently for several years, physical is cheaper; if your
workload is more transient, you choose virtual.

(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.)

~~~
mathattack
Somewhat, though companies (say Netlfix) may use the cloud even when they can
fully utilize machines.

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.

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qaq
Likely the most valuable part of Zynga at this point.

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markbnine
When I first read this I thought Zynga was going to move their HQ to Market
Street.

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aluminussoma
Adobe passed on that space and surely regretted it when they started growing
again. Adobe would surely be interested in it - if Zynga were to vacate.

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andhess
The title of this is incredibly confusing - at first I thought it was about
Zynga moving to Market Street.

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bluesix
Surely the could've said "up for sale". But the capitalised "M" on market was
just trolling.

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Negative1
So from the article, Zynga was going to post a loss (if I read that
correctly), but because of the sale, they'll post a hefty profit. Given the
artificiality of this profit, are execs still expecting to be paid performance
bonuses?

If so, wow, very shady.

~~~
beedogs
This is the kind of trick that only works once, though. The smart folks should
see the writing on the wall.

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princetontiger
I work at Zynga... The office building is awesome. The amenities at Zynga are
still some of the best in the Bay Area. Awesome gym, large basement arcade,
and snacks everywhere.

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daheza
It doesn't appear to be actively listed yet
[http://www.loopnet.com/locations/zynga-
inc_/properties](http://www.loopnet.com/locations/zynga-inc_/properties)

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neptunespear
Fun fact: The CEO of Zynga founded EA Burnaby, in my hometown.

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strimp099
To be promptly purchased by Palantir.

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beedogs
This just postpones the inevitable.

