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Zynga's IPO Performance: An Analysis

12/17/2011

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Zynga priced its IPO at $10 per share, started trading at $11 per share, but closed below its IPO price at $9.50 on its first day of trading.  Why did Zynga break its IPO price?  Based upon various reports, there are several reasons why this might have happened:

Valuation / Offering Size and Price.  Some reports have indicated that Zynga's IPO valuation, at a $7 billion market capitalization, is too high.  While this valuation was lower than some estimates, perhaps the market felt that this was still too high.  Other reports felt that Zynga should have sold less shares in its IPO (it  sold 100 million shares), raising less money, but creating a supply-demand imbalance that would have driven the stock price up on the first day.  Zynga sold 14% of its outstanding shares in its IPO, which  is a smaller amount than the usual 20% to 30% that is sold in an IPO.  Some felt that if Zynga sold only 10% of the company in the IPO, the stock price would have shot up.  I'm skeptical of the long-term effects of this type of "low-float IPO" strategy, as it is retail investors that drive the stock price up in these offerings, and once the retail exuberance wears off, the stock price can come crashing down.

Business Model Concerns.  While Zynga is profitable, one report suggests that recent profitability may have come from accounting changes and that the company may only have been near breakeven otherwise.  In addition, Zynga obtains the vast majority of its revenue from Facebook, and hasn't to date developed its revenue-generating business significantly beyond the Facebook platform.  Finally, Zynga profits from only 3 percent of its players that purchase virtual game pieces, and the growth rate of bookings is slowing.

Stock/Voting Structure.  Zynga has a three tier stock structure, where Marc Pincus has 70 votes for every one share he owns, other insiders have seven votes for every one share they own, and public stockholders have one vote per share they own.  This translates to Mark Pincus and other insiders having voting control over the company.  The argument for insiders having this much voting control is to allow management to focus on long-term shareholder value and not be worried about short term stock price swings.  The argument against it is that the management may not be able to handle the growth and would need to be replaced, which would be impossible to do if they control the company.

Market Factors / Market View of Social Gaming.  Some reports suggest that given the volatility in the markets, investors are becoming more wary of social gaming.

Sources:

Reuters:
http://www.reuters.com/article/2011/12/16/zynga-idUSL1E7NGPQ20111216

VentureBeat:
http://venturebeat.com/2011/12/17/why-did-zyngas-stock-tank-on-day-one-analyst-cites-red-flags/

NY Times DealBook:
http://dealbook.nytimes.com/2011/12/16/zyngas-modest-debut/

Wall Street Journal:
http://online.wsj.com/article/SB10001424052970204466004577102371445084982.html?mod=googlenews_wsj

24/7 Wall St.:
http://247wallst.com/2011/12/15/zynga-ipo-prices-great-offering-lousy-voting-rights-znga/


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