Zynga Enlarges Its War Chest

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Pincus may also tap the war chest for a big acquisition. Though Zynga has until now purchased only small gaming companies, mostly for the talent, it may strike a larger deal to avoid being left behind by a competitor. The Playfish deal, announced Nov. 10, gave one of Zynga's top rivals access to capital and the rights to popular game franchises. "If there is another Playfish that comes up, we'd like to be in the running," Pincus says. Still, the company won't rush into a deal. "The wisdom in business is that 50% of mergers don't work," says Bing Gordon, a former Electronic Arts executive, who, as a Zynga director, holds sway over how the company spends money.

Advertiser Controversy

There's plenty to go around, thanks to the DST deal and the millions of dollars from virtual good sales. In April, Pincus said Zynga generated more than $100 million in annual revenue. Some analysts say the figure may rise to more than $300 million this year. Pincus won't discuss specifics for 2009 sales, though he concedes the company's revenue took a hit last month after Zynga dropped some controversial promotions. Certain in-game marketing ploys offered users virtual currency in exchange for signing up for misleading offers from third-party advertisers. As TechCrunch founder Michael Arrington pointed out in a blog in October, some offers resulted in users getting billed for monthly subscriptions they did not request. After removing most of the ads from Offerpal—the broker of such promotions—Zynga says its revenue dropped 10%. Still, the lack of promotions led to an uptick in users paying for more virtual goods that has almost canceled out the decline, Pincus says.

DST wasn't deterred by the bad publicity. The investor sees Zynga, like Facebook, as a long-term prospect for growth, both in the U.S. and other countries. The model is similar to that of Tencent, an online game company in China, says Yuri Milner, CEO of DST. "Zynga is really executing the model that works elsewhere, like in China," he says. "That's exactly the reason why we think it's a big opportunity." The firm says it will not take a seat on Zynga's board or have much direct involvement in the company's operations.

Neither DST nor Zynga would say where the investment pegs Zynga's total valuation. Analysts say the company may already be worth more than $1 billion.

By welcoming new funds, Zynga is taking a detour from a public offering—a direction it had explored in recent months. Sensing the pressure Wall Street would put on its management, Zynga instead opted for the cash and liquidity offered by DST. The company will spend a portion of the investment round buying back stock from employees and other shareholders. Comments Gordon: "It's probably a pressure release."

Douglas MacMillan is a staff writer for BusinessWeek in New York.

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