Zynga Inc., the biggest maker of games on Facebook, is seeking a valuation of as high as $10 billion in an initial public offering, according to two people briefed on the matter.
Zynga plans to raise about $900 million by selling stock at about $8 to $10 apiece, said one of the people, who asked not to be identified because the plans haven’t been made public. Zynga will sell 10 percent or fewer of its outstanding shares, which are scheduled to be priced on Dec. 15, the person said.
At $10 billion, Zynga would be the second-largest U.S. game company after Activision Blizzard Inc. (ATVI), which has a capitalization of $14.2 billion. Electronic Arts Inc. (ERTS), which bought Zynga rival PopCap Games in August, has a market value of $7.69 billion based on yesterday’s close. The IPO would also value Zynga at as much as 9.8 times trailing 12-month sales, compared with about 3 times for Activision and 2 times for Electronic Arts, according to data compiled by Bloomberg.
The valuation “creates a lot of pressure upfront to deliver high sales growth and earnings,” said Walter Todd, co- chief investment officer at Greenwood, South Carolina-based Greenwood Capital, which oversees about $940 million.
The proportion of stock that Zynga plans to make public is lower than in most IPOs. So-called low-float offerings can boost demand, “but at the end of the day, the fundamentals are going to have to work,” Todd said.
Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to comment.
Paying Customers Climb
Under Chief Executive Officer Mark Pincus, 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 -- say, a townhouse in “CityVille” or a shipyard in “Empires & Allies.” Zynga is pressing ahead with IPO plans even as other Internet companies that recently sold shares, including Groupon Inc. and Angie’s List Inc., get hammered. Both were trading yesterday below their offer prices.
Founded in 2007, Zynga has hired Morgan Stanley and Goldman Sachs Group Inc. (GS) to manage the IPO. Zynga’s shares will trade on the Nasdaq Stock Market under the symbol ZNGA.
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.
Keep Customers Hungry
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 goods, 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 Inc. 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.
The $10 billion IPO valuation is lower than the $14.05 billion that the company said in regulatory filings represents its fair value.
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.
Jive Software Inc., the maker of social-networking software for businesses, seeks to raise as much as $117 million in an IPO that would value it as high as $573 million, the Palo Alto, California-based company said in a filing yesterday.
Reuters reported Zynga’s valuation yesterday on its website.