Investors Might Bet the Farm on Zynga IPO - The UpStream

Investors Might Bet the Farm on Zynga IPO

posted Sunday Jul 10, 2011 by Jon Wurm

Investors Might Bet the Farm on Zynga IPO

A Zenga Initial Purchase Offering (IPO) has been a long time coming and with all the recent Internet company IPOs like LinkedIn, Groupon and Pandora, the timing seems to be appropriate. Not to mention that Zynga makes all of them, including Facebook, look very shaky as far a business models and profitability is concerned. On July 1st of this year they official filed and are moving forward quickly. A $91 million net income for last year is a huge difference from a loss of $53 million in 2009 and their growth is still increasing. They are well poised for a successful IPO that could increase their valuation to as much as $20 billion. However, Zynga isn't looking at this through rose-colored glasses.

Hit the break to see how Zynga plans to move forward and address their concerns.

With IPOs there is alway a control issue. How do you raise the most capital while giving up the least control? Zynga has crafted an odd 3 tiered common stock system consisting of Class A, B and C common stock shares. Class B and C will remain with owners and managers while Class A will be sold to new investors. Class A stocks will be entitled to one vote per share while Class B and C stocks will be entitled to greater than 1 vote per share. This will keep the balance of power in favor of the owners and managers: something you want to make sure doesn't slip away when you're trying to sell $1 billion worth of new stocks.

Another and perhaps their greatest risk right now is fellow IPO Facebook. Nearly all of their business filters in through the Facebook platform right now which has put Zynga in some bad positions in the past. In the IPO filing Zynga did mention how Facebook policy changes had adversely affected them. Most of all, the requirement of Facebook social gaming partners to use Facebook credits from which Facebook keeps 30%. This is how they worded it in the filing,

We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock.

They have invested a lot of time and money in mitigating this problem with mobile apps and such but it seems they will be chained to Facebook for a while to come. Of course, when Facebook falls on hard times over the next couple years, this will put Zynga in an even more precarious position. As far a the details go, Zynga hasn't selected a ticker symbol, launch date or listing venue but this information should become available over the next month or two depending on how fast the SEC moves.

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