Dec. 20, 2011 - ZYNGA's (NASDAQ: ZNGA) overly hyped IPO has been confirmed a dud on its second day of trading. Zynga’s stock took a heavy beating on its opening day last Friday, falling as low as 12% below its $10/share offering price (already slashed from its initial pricing target of $25/share in June; Read more here) for an intraday low of $9.02 and closing at a meek $9.50/share. Zynga fared no better its second day of trading on Monday, dropping to just $8.75 before settling at around $9.24 on Tuesday afternoon, 8% below its offering price just 3 days after its IPO. To compare, the NASDAQ closed just -1.37% below its price two days after Zynga’s offering.
Early this summer, PrivCo correctly called Zynga's initial valuation of $25/share (or nearly $25 billion) too high by a factor of up to 400%. Last month, PrivCo again accurately called the $10/share IPO pricing unrealistic.
Aside from Zynga's company-specific issues detailed in our research above, PrivCo, the Private Company Financial Authority, has put together a list of key tactical errors made that factored into the "busted IPO" (in Wall Street parlance):
1. Float Not Restricted: Zynga did not restrict its float to under 10% like its recently public Internet cousins Groupon and LinkedIn. In contrast, Zynga's total float was nearly 15% of shares outstanding. Zynga sought to raise $1 billion regardless of price, and as pricing was cut, Zynga increased shares accordingly, to the detriment of its price performance.
2."Green Shoe" Massive: The size of the underwriter's overallotment option (aka the "Green Shoe" in Wall Street parlance) was a whopping 15% of total IPO shares offered (15 million shares in the overallotment). These are shares that the underwriter may purchase in the first days after trading at the same $10 price - at their option - to keep for themselves and/or to issue to IPO investors who had been allocated less than their requested shares. PrivCo research shows the average overallotment percentage in 2011 was 7%. Zynga's very large green shoe represented a massive overhang of new shares to be issued.
"Remarkably, with the shares now selling for just over $9/share, ZYNGA may be the first high profile tech IPO where the underwriters will likely NOT exercise their overallotment option (as IPO investors can simply pick up more shares on the open market for less than the $10 overallotment price)," says Sam Hamadeh, Founder & CEO of PrivCo, the New York based data provider on private companies and IPOs.
3. “Valuation Gouging”: PrivCo notes that Zynga bought back $6 million shares from Mike Verdu and Cadir Lee (Zynga’s Senior VP of Games and CTO respectively), at $6.43/share in January of this year. This is all fine and good until Zynga CEO Mark Pincus himself sold $109 million of shares to Zynga in March for $14/share, more than double the price paid just two months earlier. It’s a tough pill to swallow saying Zynga’s valuation doubled in such a short timeframe with virtually no change in its operations. Keep in mind these events occurred right before Zynga’s S-1 filing, adding uncertainty to an already shaky valuation.
"The timing, valuation, and size of the Pincus cash out certainly raises eyebrows," notes PrivCo's Hamadeh.
Implications for Facebook’s IPO:
Facebook's executives and bankers will surely take note of Zynga's mishandled IPO and overly aggressive valuation. The core difference between the two companies is that Facebook owns the underlying Facebook developer platform, whereas Zynga is merely a developer. By operating the platform, Facebook has more leverage in its operations. PrivCo believes that Zynga's poor IPO reception will tamper down Facebook's valuation to a more reasonable figure (likely less than the current $100-$120 billion whisper number on Wall Street, perhaps as low as $80 billion). PrivCo also predicts Facebook will limit its IPO float to under 10% of total shares (likely closer to 8%), in order to ensure that Facebook stock's price has room to increase post-IPO.