News Corp has hired tech and media investment bank Allen & Company to sell off MySpace, the WSJ reports. Allen & Co will now schedule meetings with interested buyers, of whom there are about twenty, including financial firms.

We think Zynga should buy MySpace (see below) but one of the options on the table is to combine it with a social gaming firm into a new entity for a mix of cash and stock. That would be a smart way for one of the smaller social games maker to gain an edge in that hyper-competitive and hyper-profitable industry. Another possibility would be a private equity firm who can buy it for a low enough price that it can just milk it for cash until it finally dies off…

MySpace is for sale.

Zynga should buy it.

We got the idea from former MySpace CEO Jason Hirschhorn who tweeted:

“MySpace has big traffic. It’s for sale. Users play games there. Most social game companies are dependent on Facebook. Gotta be a fit. Just saying.”

Some FAQs:

Why should Zynga buy MySpace?

Zynga spends about 20% of its revenues acquiring new gamers through Facebook ads. This spend came to about $170 million last year.

In the worst-case scenario Zynga could milk MySpace as a different kind of user-aquisition tool. Imagine the thing as a giant CityVille banner. In this case, the valuation math is simple: How much are 44 million new users worth?

In the best-case scenario, Zynga would turn MySpace into a second platform for its games.

Right now, Zynga is too dependent on Facebook.

One industry source put it best: “If I owned a T-Shirt company and was killing it and yet I only sold my shirts to Walmart, what happens when Walmart doesn’t want my t-shirts anymore? I’m screwed. Hedges are important.”

In fact, Zynga loses out on profits due to its Facebook dependancy.

In addition to taking 20% of Zynga’s revenues through ads, Facebook also takes a 30% cut of every virtual currency sale Zynga makes. That’s why $850 million revenues turned into $400 million profits in 2010.

Zynga knows it has this problem. Last year, it thought about launching its own destination site, ZyngaLive.com. Buying MySpace would be easier and faster.

How much should Zynga pay?

Answers.com, which has garbage Google ad inventory, growing revenues, some profits and about 55 million US unique users (ComScore), just sold for $127 million.

MySpace has garbage Google ad inventory, shrinking revenues, some profits and about 44 million US uniques (ComScore).

Zynga should pay $50 million or less. It has the cash.  It profited $400 million in 2010 and just raised another $500 million.

Should News Corp take cash or stock?

Stock! $50 million is a tiny amount of cash for News Corp, but Zynga is growing so fast that $50 million worth of Zynga stock today could be worth multiples of that in a matter of months. Zynga will probably want to pay cash.

Would ex-MySpace CEO and current Zynga COO Owen Van Natta be cool with the deal?

A source close to Owen tells us, “He would definitely be cool and more importantly, add big value as long as there were no lingering ties into News Corp.”

What will hold the deal up?

News Corp paid $580 million for MySpace back in 2005. Rupert Murdoch might not be happy selling it for a tenth of that price 6 years later. We worry he might want closer to $150 million, which is probably too much for a declining asset like MySpace.

Zynga might not like the deal because MySpace users don’t have as much disposable income as Facebook users. Also, you can’t underestimate how fast MySpace visits are dropping. The site had 70 million US uniques in January 2010. It’s down to 44 million.