Zynga is certainly a company to track via this blog that assumes the social networking and media IPO wave is the next pump and dump scam orchestrated by the elite insider construct. Zynga makes video games that primarily are available via the social networking show piece Facebook. Zynga went public through the IPO process in December 2011. Zynga represented the second largest internet based IPO in the United States since Google back in 2004. The company raised $1 billion in the IPO at a pegged selling price set by the underwriters at $10 dollars per share. Many press releases called the IPO a disappointment because the stock closed lower than the IPO pegged price on the initial day of trading, but from a “company” perspective, which seems to take the back seat in IPO debuts, this was a very successful IPO. If the “company” can raise capital close to the pegged price then it maximizes its capital per share sold. But, the company only floated 14% of the inside shares limiting the amount of capital that flowed into the “company’s” coffers. I wonder how much money the company could’ve raised if it sold 30% or 40% to the public? But that isn’t important now, the rest of the shares (86%) now belong to the insiders and not the “company”. And when those shares are sold nothing goes into the “company’s” bank account. You know where it goes right? There were also additional disappointments. At one point in time the company’s valuation was at $20 billion, then it dropped to $14 billion, and finally was offered to the public at a more humble valuation of $7 billion. It seems investors are not so confident in a company that develops video games targeted primarily at Facebook users.
Zynga is already exposing my hypothesis that the whole social networking and media IPO frenzy is merely fabricated for the short-term billions of gains by insiders. When a company goes public via the IPO process, insiders aren’t allowed to start selling their insider shares for six months (lockup period). But the Zynga “team” found a way around these rules. They have decided to make a secondary public offering. The details are not yet finalized but the insiders plan to sell approximately 15% of their shares to the public which will generate over $500 million. But none of this money goes to the “company” to fuel acquisitions or operations. All this cash goes to the insiders. The CEO and founder of Zynga, Mark Pincus, will make $198 million on the deal. Other insiders will cash in on the rest of the secondary offering. This early cash out represents at least half of the cash earned by the “company” through the IPO process. Remember, the insiders still have 85% more shares to sell to the naïve and vulnerable public. So when all is said and done, the insiders will blow away the amount of money they accumulate versus the amount of money the “company” raised via the IPO process. The new lockup period will expire in August 2012 (management was required to move the original lockup period outward so they could make the secondary offering). I wouldn’t be surprised if the Facebook IPO occurs around this time (in the summer) to further maximize the insider gains. I suspect all social networking and media companies that are public will ride the media hyped IPO of Facebook and since Zynga is connected to the hip of Facebook, they will enjoy an even greater ride. I will be tracking Zynga’s insider trades (and all the others) during this Facebook IPO.
The argument Zynga’s management put forward supporting the secondary offering was to avoid a large sell off from insiders in May 2012 once the lock up period expired. Most of the press releases cited this argument. My fundamental question is why would this be a concern? If the insiders felt like the company was going to be a long-term play why would they sell large amounts of shares just six months after the IPO? I understand selling a small percent to hedge future risk in the economy, but why would they flood the market will a huge percentage if they felt like the company had immense growth, profit, and cash flow potential well into the future? If the company might be worth $20 billion in the future, why sell a big chunk of shares just six months after the IPO when the company is only worth $9 billion? Something stinks here. Do you smell it? One analyst made a comment that I agree with on a philosophical level. — “It is never a positive to see a founder sell off shares,” Sterne Agee analyst Arvind Bhatia said. This analyst hit the nail on the head in my logical opinion. Only time will tell I guess. Regardless, I hold true to my position that the fact insiders make a lot more money than the funds received by the “company” via the IPO process is a form of legalized fraud, or at the very least, a symptom that the IPO process is not built around funding an enterprise, but designed to favor the bank accounts of the insiders.