(Bloomberg) — Zynga Inc. will sell about 15 percent of its common stock in an initial public offering, said a person with knowledge of the matter, breaking with a practice among Internet companies this year of using a lower free float to boost demand.
Zynga, the biggest maker of games on Facebook Inc.’s site, plans to sell shares for $8.50 to $10 apiece in its initial public offering to raise as much as $1 billion, said the person, who declined to be identified because the terms are private. That would value Zynga at as high as $7 billion, less than it previously had targeted, the person said.
The game developer decided against a low float for its stock after companies such as Groupon Inc. and Pandora Media Inc. tumbled following their IPOs, the person said. While selling fewer than 10 percent of their shares helped those companies boost early demand for their offerings, the stocks have more recently dropped below their initial prices.
“It’s 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.”
Zynga, whose shares will trade on the Nasdaq Stock Market under the symbol ZNGA, plans to disclose IPO terms tomorrow, the person said. Morgan Stanley and Goldman Sachs Group Inc. are managing the IPO.
Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to comment.
Led by Chief Executive Officer Mark Pincus, Zynga is seeking 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 — say, a townhouse in “CityVille” or a shipyard in “Empires & Allies.”
A $7 billion market value would price Zynga at 6.8 times trailing 12-month sales of $1.02 billion, according to financial results disclosed in the company’s IPO filing. Electronic Arts Inc., the game maker that bought Zynga rival PopCap Games in August, was valued at $7.73 billion at today’s close. That’s about two times sales over the past 12 months, Bloomberg data show.
Zynga’s targeted valuation is less than half the $14.05 billion that the company said in a September regulatory filing represented its fair value in August.
Zynga updated its IPO filing on Nov. 4 to show that 6.7 million of its users were paying customers in the first nine months of the year, up from 5.1 million in the year-earlier period. 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.
To help it add more customers hungry for virtual items, Zynga is stepping up spending on research and marketing — which in turn is crimping profit. The company posted $30.7 million in net income in the nine months that ended in September, down from $47.6 million a year earlier.
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,” “CastleVille” 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 between 91 percent and 94 percent since the beginning of last year, according to Zynga filings.
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.
Facebook, the world’s largest social networking service, is also making preparations for an IPO. The company is considering raising about $10 billion in a deal that would value it at more than $100 billion, a person with knowledge of the matter said this week.