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Facebook's anemic IPO takes heavy toll on Zynga

Facebook's anemic IPO takes heavy toll on Zynga

May 18, 2012 | By Chris Morris




Through sheer force of will, Facebook managed to avoid closing at below its IPO price during its first day of trading on Wall Street. Unfortunately, that didn't help its allies.

Zynga saw its stock lose roughly 14 percent of its value Friday after briefly dropping to an all time low. Shares of the company closed at $7.12 following what can only be called an insane day of trading.

The problems started early. Zynga shares began their steep decline in the moments before Facebook began trading, prompting a trading halt at 11:37am a standard NASDAQ procedure for any stock that moves 10 percent or more in a five minute period. That "time out" move typically lasts no more than five minutes (to give investors time to gather their wits). Zynga shares were halted for over 50 minutes over the course of the two curbs, though.

Put in gaming terms: Nasdaq had an Error 37.

The slide, which cost founder Mark Pincus nearly $130 million (on paper), was tied to a pair of factors technical snafus at Nasdaq and investors showing disappointment with Facebook's performance.

On the technical side, Nasdaq was overwhelmed by volume early Friday, due to demand for Facebook shares. (By 1:40pm, more than 320 million shares of the company had been sold.) That seems to have tripped up the electronic trading system. Nasdaq didn't get things resolved until 2:01pm.

Shares rebounded somewhat once Zynga resumed trading, but they couldn't hold that recovery. That's where Facebook is to blame.

Some of the decline came from people who dumped Zynga shares to grab a piece of the year's big IPO.

"I don't think there's anything fundamental about Zynga that has changed this morning," says Colin Sebastian of Robert W. Baird. "I think there are some investors that sold some of their Zynga shares just to buy Facebook."

But Facebook had a weak showing on the stock market on its first day. While shares of the company started relatively strong, they didn't hit the peaks many investors were expecting and fell quickly.

Underwriters aggressively bought shares at the end of the day to 'defend' the $38 IPO price, buying actively to ensure the stock didn't fall below its offering price on its first day, according to CNBC. (They succeeded. Facebook closed at $38.27.)

Zynga has long been considered a Facebook "tracking" stock. Investors who wanted to own a piece of the social media giant saw the chance to use Zynga in remora-like fashion and invested. And as Facebook failed to live up to expectations, they dumped them.

Other social media sites that served the same purpose to those investors are also taking a hit Friday - Shares of LinkedIn were down 6 percent. Groupon was off 7 percent and Yelp fell 3 percent a comeback from the 7 percent drop it saw earlier in the day. China-based social networking firm Renren Inc, also saw shares fall by 21 percent.

Investors in those companies were expecting to see a spike as Facebook shares went through the ceiling. But they didn't count on a few things. For one, Facebook added another 84 million shares to its offering at the last minute and the company also increased its offering price.

Together, it took some air out of the balloon. And when Nasdaq couldn't keep up with orders early on (and, let's be fair, 82 million shares of a single stock being traded in the first 30 seconds is pretty overwhelming), traders backed off, which further hit the stock.

Things might get worse before they get better, too. Friday's fumble could make for a rocky Monday for the stock. And Pivotal Research has already given Facebook shares a "sell" rating. Meanwhile, other Wall Street firms will be giving the now public stock a second look in the weeks to come.

If more analysts pile on with poor ratings - and if the company's stock price continues to waver - Zynga could find itself continuing to play the role of whipping boy for its most important partner.


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