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Zynga IPO Fails To Impress « Back
Matt Atkins, February 2012
December 2011 saw social gaming company Zynga, famous for Farmville, go public in an IPO which made the company $1bn. The offering of 100 million shares at $10 each valued the firm at $7bn, and made the technology deal the largest to price since Google went public in 2004. But the IPO surprised analysts, who expected greater things from the company.

High expectations

Zynga’s IPO was much more restricted than that of other social media firms, such as LinkedIn and Groupon. Earlier in the year both were priced at 17 times their previous-year sales. Zynga was priced at just 11 times that figure. Prior to the sale the firm was valued at $9bn, although this was just a snip of the $20bn it expected to raise back in July 2011, amid a surge of investor confidence in social media ventures, and before stock markets started to slide.

With more than 60 million daily users, the San Francisco-based company is differentiated from other social media firms by its profitability and well-developed business model.

The firm doubled its revenue in 2011. This fact, however, did not save Zynga from a disappointing first day’s trading, with shares dropping below the offer price within 10 minutes of opening, and closing down 5 percent at $9.50. The firm’s second day of trading was equally poor, with stock declining a further 5 percent. This performance contrasts sharply with that of other web debuts in the past year. Both Groupon and LinkedIn saw significant first day jumps, the latter doubling its stock price on its first day trading. According to Dealogic, Zynga was one of only six US internet IPOs to close below their issue price on their first day in 2011.

What went wrong?

Zynga’s failure to match the success of other social media IPOs has been the subject of much speculation. While the firm is profitable, its business relies on its ability to continue producing hits – the firm had four of the top five social games on Facebook, based on daily users, in a poll taken in September 2011. Maintaining this dominant position is key to future success. Paradoxically, the firm’s business relationship with Facebook is a concern. Zynga also relies heavily – some say too heavily – on the internet giant to host its games, and competition is increasing.

The volume of shares offered by the firm may explain its lacklustre results. Zynga sold 14 percent of its total shares – more than that offered in more successful offerings. Groupon and LinkedIn both offered between 5 and 9 percent. Selling a smaller percentage of shares, it is argued, ups demand, and hence the price, by reducing supply.

A shift in attitudes toward tech firm IPOs, and more generally those of social networking firms, may also be to blame. In a period of renewed turbulence, investors have come to increasingly scrutinise web companies and their business practices. This follows a peak of activity which saw a number of high profile IPOs subsequently lead to disappointing results. Even the stocks of relative success stories have suffered in recent months – Groupon has traded below its IPO price, and LinkedIn remains 30 percent below its first day’s closing figure.

Has the bubble popped?

Does Zynga’s performance mark the end of the social media bubble? Recent IPOs show investors may be more sceptical about web firms – understandable when you consider that Zynga is currently priced above gaming powerhouse EA Games, and that Groupon, a company which is in no way profitable, debuted at $20 a share.

Some do not believe we are seeing a pop however, merely the continuation of a trend. Given the buzz surrounding the company, Zynga's reception on Wall Street was surprising, but it is also somewhat in keeping with recent IPOs in the industry. Of the 31 internet and social media companies that have gone public since the beginning of 2010, 19 are now trading below their IPO prices, according to research firm Birinyi Associates. Zynga’s performance, then, could be seen as the norm rather than a shock result.

Whether there was a bubble to pop in the first place is up for debate, but the real concern is what the performance of tech stocks means for the industry. Some fear that recent turbulence may prevent investment into start-ups and discourage those who were once willing to go public. A recent PwC forecast, however, predicts that the $1bn Zynga made through its IPO, despite a lacklustre reception from investors, may encourage more companies to go public.

All told, just how deserving is the Zynga IPO of the scorn poured upon it? Given the current economic climate, that fact that the firm managed to raise $1bn – with which it now plans to fund game development, marketing and expansion – is a major achievement. Perhaps this fact alone demonstrates that the social media space is not yet exhausted?

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