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Analysis: Why Zynga's IPO Might Be 'Delayed'

Analysis: Why Zynga's IPO Might Be 'Delayed' Exclusive

August 30, 2011 | By Chris Morris




When reports crossed the wire Monday that Zynga might push back the launch of its initial public offering, the conspiracy theorists started buzzing. Later word that the SEC might play a role in the delay whipped 'em into a frenzy.

In fact, none of this was a sign of weakness or scandal. It was actually a sign that the folks running the business side of the game maker could a) read tea leaves and b) realize that early, enthusiastic investors might become confused, angry ones if a few things up weren't cleared up.

You don't have to be Warren Buffett to know the stock market (never exactly the most stable of places) is particularly turbulent these days. Fear of a double dip recession has been running rampant following the downgrade of the U.S. credit rating and that has pummeled some company stocks.

Jumping into those waters is akin to the idiots you saw on the news this past weekend riding their surfboards as Hurricane Irene moved up the East Coast. It might be a hell of a rush, but your chances of drowning are considerably higher.

LinkedIn and Pandora had rocket-like starts in trading this year, but as CNBC points out, the market is a lot less receptive to IPOs right now.

For an entity as closely watched as Zynga will be, a tepid start on Wall Street could make potential investors doubt the company's power in the gaming industry. (And say what you will about its games, you can't deny Zynga is a powerful player among publishers, luring top-tier development and executive talent.)

So market conditions alone present an understandable reason for execs to tap the brakes.

But things are a little more complicated at Zynga. The Securities and Exchange Commission has reportedly been talking extensively with the publisher about some of its accounting metrics.

Zynga has declined to comment on any of the reasons for the potential delay, but media reports indicate the SEC is concerned about Zynga's reliance on "bookings" - the total revenue from the sale of ads or virtual goods that would have been banked if the company had recorded all of that income immediately.

The company says it uses this method internally to evaluate how successful its games are working but also notes this is just a supplement to accepted accounting methods and other companies in the gaming business may not use this method, which makes it hard to compare the two.

Confused? Don't worry, the SEC (which is full of smart pants number crunchers) is still trying to make sense of it as well. That's why they're combing through the books and talking to Zynga about it in part to make sure there's nothing screwy going on, but mostly to ensure that investors don't get confused. But does it imply something nefarious? Hardly.

If you want to be truly technical, this whole tempest in a teapot isn't really a "delay" of the IPO at all. Zynga has never said it plans to begin trading in September. That was just the collective assumption.

Once it has the SEC's blessing, Zynga can begin trading basically whenever it wants. It does a roadshow for investors and pre-sells to institutions, then it can hold off until it feels the time and market conditions are right to begin trading.

Zynga has plenty of cash and doesn't have to rush into an IPO. If it waits until October or November, it has nothing to lose and possibly plenty to gain.

Short version: If you were excited about a Zynga IPO before, there's no reason to dampen that enthusiasm now. And as soon as you see two or three solid weeks of trading at the start of the fourth quarter, don't be surprised to hear that trading will commence.


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