Bloomberg News

Zynga Seeks Up to $1 Billion in Biggest Web IPO Since Google

December 07, 2011

(Updates with share price of previous investment in seventh paragraph.)

Dec. 2 (Bloomberg) -- Zynga Inc., the biggest maker of games on Facebook, is seeking as much as $1 billion in the biggest initial public offering by a U.S. Internet company since Google Inc.’s debut.

The company is offering 100 million shares for $8.50 to $10 apiece, according to a regulatory filing today. The high end of the range would value San Francisco-based Zynga at $7 billion.

The IPO values Zynga at as much as 6.8 times sales in the year through Sept. 30, or more than triple Electronic Arts Inc.’s price relative to sales in the same period, data compiled by Bloomberg show. Zynga is working to keep its lead over the Redwood City, California-based company, which bolstered its own online services by purchasing PopCap Games this year.

“In a lot of ways, they’ve found the secret sauce to optimize their games for social networks,” Anupam Palit, senior equity analyst at New York-based GreenCrest Capital Management LLC, said of Zynga. “A risk is that there’s no competitive moat -- if someone else finds a nice formula that works, they’ll use it. The EA-PopCap combination poses a very significant business risk.”

Electronic Arts had a market value of $7.73 billion, or 2 times trailing 12-month sales, as of yesterday’s close, Bloomberg data show.

Scaling Back

Zynga had originally planned a larger IPO, scaling back after Internet companies including Groupon Inc. and Pandora Media Inc. sank following their debuts this year, a person familiar with the plans said yesterday. Zynga is selling about 14 percent of its common stock, a larger portion than some Web companies have sold this year in offerings.

The price range puts Zynga’s market value at least 29 percent lower than the level implied by a February investment by mutual funds affiliated with Morgan Stanley, according to today’s filing. The funds bought 5.3 million preferred shares for $75 million, or $14 a share, today’s filing shows. When the IPO is completed, each of those preferred shares will convert to one common share, according to the filing.

Those funds may still recoup the paper loss before the IPO, if Zynga raises its asking price in response to strong investor demand. The sale is scheduled for Dec. 15, according to Bloomberg data.

Facebook IPO?

Facebook may raise about $10 billion in an IPO next year that would value the world’s largest social-networking site at more than $100 billion, a person with knowledge of the matter said this week. Google, operator of the world’s biggest search engine, raised $1.9 billion in its 2004 IPO, including an over- allotment option.

Zynga is selling all of the 100 million shares in the offering and expects net proceeds of about $889 million, according to the filing. That would add to a cash pile that totaled $604 million as of Sept. 30.

If underwriters exercise an option to buy 15 million additional shares in the over-allotment, then venture backer Avalon Ventures would sell the largest portion of Zynga at more than 2.5 million.

If the over-allotment is exercised, Foundry Group and Institutional Venture Partners would each sell about 2.5 million shares, while Union Square Ventures would offer 2.2 million. Venture firm Kleiner Perkins Caufield & Byers, Zynga’s biggest shareholder after Pincus, isn’t selling shares in the IPO.

Trimming Stakes

Google and buyout firm Silver Lake would trim their stakes by about 1.7 million shares each. Mail.ru Group Ltd. and Digital Sky Technologies, both managed by Russian billionaire Yuri Milner, would sell more than 1 million shares combined. Investment firm Tiger Global Management would offer about 554,000 shares.

Founder and Chief Executive Officer Mark Pincus, who isn’t selling any shares in the offering, will have about 37 percent voting control once the offering is complete. His salary was $300,000 in 2010, according to Zynga’s filing.

Pincus owns about 112 million shares of common stock, which the IPO would value at as much as $1.12 billion. The $10 top of the IPO range is more than 5 times the average price of $1.76 at which existing investors bought their Zynga stock, according to the filing.

Popular Games

Zynga aims to capitalize on the popularity of social networks and virtual goods. The company lets users play games for free and then makes money by selling items, such as a townhouse in “CityVille” or a shipyard in “Empires & Allies.”

Founded in 2007, Zynga has hired Morgan Stanley and Goldman Sachs Group Inc. to manage the IPO. Zynga’s shares will trade on the Nasdaq Stock Market under the symbol ZNGA.

About 6.7 million of Zynga users were paying customers in the first nine months of the year, up from 5.1 million in the year-earlier period, according to the filing. Revenue more than doubled to $828.9 million. The worldwide virtual-goods market will more than double to $22.5 billion in 2015 from $9.27 billion last year, according to Lazard Capital Markets.

In October, Zynga announced a new service, called Project Z, geared toward reducing its dependence on Facebook users. The company also introduced new games, including “Zynga Bingo” and “Hidden Chronicles.”

Ninety-three percent of Zynga’s third-quarter revenue was generated on Facebook, the world’s most popular social network. That number has ranged from 91 percent to 94 percent since the beginning of last year, according to Zynga filings.

More Mobile Games

Adding more mobile games is part of Zynga’s plan to diversify. The company said in November that the number of daily active users on mobile devices increased more than 10-fold from November 2010 to September 2011, reaching 9.9 million. By October, the number was 11.1 million.

Sunil Paul, a founding partner of venture capital firm Spring Ventures, recently joined Zynga’s board. Paul, who started software companies Brightmail Inc. and FreeLoader, was brought on because of “his extensive experience with Internet companies,” Zynga said on Nov. 17.

Groupon went public earlier this month, helping revive the IPO market after the European debt crisis and stock-market volatility hampered deals. The shares of the Chicago-based company, which leads the Internet-coupon industry, have dropped 5.3 percent through yesterday.

Angie’s List, a site that rates plumbers, contractors and other service providers, has seen its shares decline 3.5 percent since their debut on the Nasdaq on Nov. 17.

Groupon Effect

Zynga’s choice to seek a lower valuation “is a reflection of what we’ve seen in Groupon,” said David Dillon, a San Francisco-based portfolio manager at HighMark Capital Management, which oversees about $17 billion. “If you price yourself too high, you do yourself a disservice in the long term.”

Declines in shares of newly listed Internet companies this year have come as the Standard & Poor’s 500 Index plunged as much as 19 percent from a peak and volatility spiked to a two- year high. LinkedIn Corp., which more than doubled in the weeks following its May IPO, now trades about 50 percent above its offer price.

Yelp Inc., which features user reviews of restaurants and businesses, also is planning an IPO. The San Francisco-based company filed on Nov. 17 to raise as much as $100 million in a 2012 offering. The $100 million amount is typically used as a placeholder to calculate fees and may change.

--Editors: Julie Alnwick, Tom Giles

To contact the reporters on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net


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