Zynga Inc., the largest maker of games for Facebook, declined in its first day of trading after raising $1 billion in an initial public offering that gave it a greater valuation than rival Electronic Arts Inc. (ERTS)
The shares, listed on the Nasdaq Stock Market under the symbol ZNGA, fell 5 percent to $9.50. The developer of games such as “CityVille,” “FarmVille” and “Mafia Wars” sold 100 million shares for $10 each, the top end of a proposed range.
Zynga gets more than 90 percent of its revenue from Palo Alto, California-based Facebook Inc., and faces increasing competition from Electronic Arts, which bolstered its own online services by purchasing PopCap Games this year. Nexon Co., a Tokyo-based maker of games for Facebook including “Zombie Misfits,” slumped 15 percent this week after raising $1.2 billion in an IPO, Japan’s biggest this year.
“Zynga was offered at a pretty aggressive price relative to other game makers in the marketplace,” said Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank. “Anyone that has any affiliation with social media is getting bought up by an investing public that wants to be involved. And then reality hits.”
The offering is the biggest by a U.S. Internet company since Google Inc. (GOOG) raised $1.9 billion in its 2004 IPO, data compiled by Bloomberg show.
“Zynga and its games are becoming consumer brands, and there is a lot of recognition for growth potential,” he said.
Founded by Chief Executive Officer Mark Pincus in 2007, Zynga doubled sales to $829 million in the first nine months of 2011. The IPO valued Zynga at as much as $7 billion, or 6.8 times revenue in the year through Sept. 30. That’s more than three times rival Electronic Arts’ price relative to sales over the same period.
“We’re bigger believers in the future of play and social gaming than any other company and we wanted to be in a position that we had the resources to invest more in that future than any other company,” Pincus said in an interview today.
Electronic Arts, the Redwood City, California-based maker of “The Sims” and “Scrabble” for mobile devices, had a market value of $6.9 billion as of yesterday’s close, or about 1.8 times trailing 12-month sales.
Zynga planned to offer about 14 percent of its common stock, according to a regulatory filing. That compares with less than 10 percent for companies including Groupon Inc., LinkedIn Corp., and Pandora Media Inc., which made their public debuts this year. Internet companies have used smaller free floats to boost initial demand for their stock, pushing the price higher.
Zynga sold all of the shares in the IPO, and plans to use net proceeds for game development, marketing and general corporate purposes, according to its filing.
Underwriters have an option to buy an additional 15 million shares to cover over-allotments, Zynga said in its statement. That may allow backers including Avalon Ventures, Foundry Group and Google to trim their stakes, according to the original terms of the offering. Venture firm Kleiner Perkins Caufield & Byers, Zynga’s biggest shareholder after Pincus, didn’t plan to sell shares in the IPO.
Groupon, Angie’s List
The market value Zynga sought in its IPO was less than a $14.1 billion fair-value estimate of the company’s worth as of August, according to the prospectus. The company settled on a price range after taking into account recent IPOs that underperformed, according to a Dec. 10 filing. Morgan Stanley and Goldman Sachs Group Inc. led Zynga’s offering.
Groupon, the Chicago-based provider of online coupons, raised $805 million in its IPO last month, including the over- allotment option. The shares, which surged as much as 31 percent in the first weeks of trading, have since fallen 12 percent from their high, based on yesterday’s close.
Angie’s List Inc., the Indianapolis-based operator of a consumer-reviews website, raised $132 million in its IPO last month, including an over-allotment. The stock surged in its first day of trading before falling as much as 11 percent below its offer price.
Both Groupon and Angie’s List are trading above their offer prices.
Facebook, operator of the world’s largest social network, is examining a $10 billion IPO that would value the company at more than $100 billion, a person with knowledge of the matter said last month.
Sixty percent of the Internet or social-media companies that completed U.S. IPOs since 2010 are trading below offer price, Kevin Pleines, an analyst at Birinyi Associates Inc. in Westport, Connecticut, said in a Dec. 13 research note. Buyers of the shares at their opening trade in the public market have lost an average of 32 percent, Pleines said.
Zynga “shouldn’t be valued at three times what other companies in that space are valued at,” said Jeffrey Sica, chief investment officer of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion. “That’s why people looked at it as having a potential downside. Investors found it too rich.”
Zynga was also held back by “overall concern in the market,” said Sica, who nevertheless advised clients to buy the Zynga IPO. “An IPO investor can’t be oblivious of the environment the IPO is coming out in.”