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Zynga, Rovio And The IPO Issue
Zynga, Rovio And The IPO Issue Exclusive
October 19, 2011 | By Chris Morris

You don't have to be a wizard of Wall Street to know the market sucks these days. While the Dow Jones Industrial average is slightly higher than it was at the start of the year, persistent fears of a double-dip recession – or worse – are preventing both individual and institutional investors from jumping into the market with any gusto.

That's starting to affect the valuations of companies with looming public offerings, including a high profile one in the gaming world. And it should be a lesson to other game companies thinking about an IPO.

Zynga, of course, is the company that's most in the crosshairs these days. It's moving forward with its plans to list on the Nasdaq market, likely before the end of the year. But the excitement level surrounding the social games maker, which was stratospheric when it made its initial S-1 filing with the Securities and Exchange Commission in July, has slipped with each of the company's four revisions to that prospectus.

Revenues are up, which certainly isn't bad, but net income is down as marketing and hosting costs increase. And while it wasn't that long ago that Zynga's public offering was expected to make it the largest publicly traded game company, with a valuation of $15 to $20 billion, that's looking far less likely now.

Earlier this week, analyst Sam Hamadeh of PrivCo, which examines privately held companies, said he puts the expected public value at closer to $5.5 billion.

While that likely upsets the venture capitalists looking to cash out of Zynga, realists are probably pretty happy. If you'll recall, the earnings multiple (a nerdy moneyspeak term that lets bean counters more accurately compare the value of companies) on a $20 billion Zynga valuation in July was a whopping 46X. (Read a plain English explanation of that terminology and the math behind it here.) It was, to many, the definition of a bubble about to explode.

Of course, it's ultimately the market that decides what a company is worth, and with all the shuffling going on at Zynga, investors are nervous. The most recent SEC filings indicate company founder Mark Pincus will retain a vast majority of the company even after the IPO, thanks to the creation of a third class of stock.

Pincus would hold all of those shares, with each having 70 votes at shareholder meetings. (VC investors would get seven votes per share in their stock class, while plebes who buy stock as part of the IPO will get just one vote per share. Welcome to steerage class.)

You would think Angry Birds maker Rovio, which has been crowing about its own plans for an IPO, would be paying close attention to this, but it's hard to see any evidence of that.

"Mighty Eagle" (and chief marketing officer) Peter Vesterbacka told Bloomberg Television last week that the company is eyeing a 2012 public offering and believes the $1.2 billion valuation that has been attached to the company for a while now is a bit low.

I've made my thoughts on that valuation pretty clear before. Simply put, though, the company's dependence on a single franchise, even one like Angry Brids that has plenty of offshoot revenue streams, is the sort of investment that might sound good in theory, but that investors tend to flee from – especially in rocky markets.

Meanwhile, the ongoing economic uncertainty worldwide is prompting some companies to think about withdrawing from the market. Chinese MMO operator Shanda Interactive is hoping to do just that, in fact.

Other game-related companies, like Gamefly, have been remarkably quiet about their own IPO plans, indicating they've put them in deep freeze for the time being.

Neither Zynga nor Rovio seem to be following that path. But as the financial media and Wall St. analysts sound warning bells about Zynga and its valuation, you have to wonder… are these companies moving forward with the IPOs out of hubris, to cash in while there's still a degree of optimism about their market or in an honest belief that investors will see substantial returns?

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Alan Rimkeit
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This is a bubble, like the tech bubble of the 90's in the Silicon Valley. I just hope it is more localized and does not spread. When bubbles like this pop it can get messy.

Harry Fields
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Anyone foolish enough to rush in to investing in these companies, clearly has not researched the market or the companies and deserves what they have coming. Rovio, with their "Angry Birds or nothing" approach, will ultimately kill them. Sorry guys, great game, but I've already stopped playing it. And Zynga..... well, they're representative of everything wrong with the "social gaming" fad.

Lo Pan
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I wonder once the Zynga IPO is approved, will see incessant 'Buy our stock and tell your friends!' pop-ups in their games. :-)

Jeremy Reaban
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Well, it's really foolish giving up control of your company when you go public.

Look at the history of gaming, all these companies that sold out (Sierra, Bullfrong, Origin, Microprose, etc, etc, etc, etc, etc, etc) to basically just be dissolved. Does that really help anyone in the long run? No, but investors who want short term profits just care about buy stock cheap then selling high later.

Jakub Majewski
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Jeremy, all these companies you mention did not go public - rather, their owners sold them to bigger companies (which probably were public in most cases, though I'm not sure. EA might not yet have been public when they bought Origin).

Generally, selling your studio to a company that has twenty other studios does indeed guarantee dissolution in the long term. Going public, however, in theory actually helps - it gives you a very large injection of cash that allows you to stay independent of external ownership.

The downside, of course, is that a) the owners are no longer really the owners, and b) you wind up spending more and more of your time on what is essentially a big PR exercise, trying to persuade the traders that your stock is still worth buying. In all honesty, I don't understand why anyone would go public with their company, unless they actually just want to get a huge chunk of money and go do something else (but then, company owners are usually prevented by law from selling their own stock for a given amount of time after going public). All that you gain, by receiving all this money, is the ability to expand faster than your management structures can handle.

Frank Gilson
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Note that there is are substantial additional costs to going public that have not been mentioned here...which, annually, can run into millions of dollars that a private company does not need to spend. This includes complying with regulations (in the US) such as Sarbanes-Oxley.

Guyal Sfere
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A non-"just cash out" reason to IPO is to get enough money to do something quickly - "build 3 factories" or "go global with 3 acquisitions and new offices in 6 countries". Things that might take another decade to do on your own, which in technology heavy industries is often long of a time scale relative to competition and the fact that the technology landscape is itself shifting. Of course, getting that money requires other people with money, who are almost always looking for a cash out.