FI516

Week 5 IPO Paper Zynga Inc.

Advanced Managerial Finance

Sharolyn Delver 2/5/2012

Running Head: IPO PAPER - ZYNGA INC.

Executive Summary
Zynga Inc. announced its decision to have an Initial Public Offering (IPO) of shares in December 2011. The news was met by some speculation as to whether or not Zynga would be able to support a successful IPO. While Zynga bills itself as the largest social game developer in the world, it is still a smaller player from a market capitalization standpoint in an industry that includes much larger companies such as Google. Over the last three years, Zyngas net income has grown by leaps and bounds. In 2008 the company reported a large loss, yet a mere two years later in 2010 it reported $96M in net income. Cash flows have also gone from negative to positive in this time suggesting that the company does have the ability to generate revenue to support its shareholders. On December 16th, 2011 Zynga offered its first public shares. The share price was lower than some other comparative IPOs at $10 per share yet was expected to bring in enough funds to meet Zyngas goals. While analysts may be calling the IPO a failure, the CEO, Mark Pincus, has billed it a success. Almost two months later, Zyngas IPO is looking more like a success. The share price has finally risen above its initial price with the announcement of the Facebook IPO and Zynga options are popular. Time will tell if Zyngas IPO was successful for the shareholders as well as for the company itself.

Running Head: IPO PAPER - ZYNGA INC.

Analysis
Company and Industry Information

Zynga Inc. is an online social game development company specializing in multi-platform games that can be played on Facebook, MySpace, Yahoo, and mobile devices. Games developed by the company include Farmville, Frontierville, Zynga Poker, and WordsWithFriends. Each of the companys games is designed to allow the user to play over a social or mobile network with their friends. The company was started in 2007 by Mark Pincus, the current Chief Executive Officer and Chief Product Officer. Pincus was also responsible for Tribe.net, FreeLoader, and Support.com (Zynga Inc., 2012). Zynga is classified as belonging to the Technology sector and the Internet Information Provider industry. It bills itself as the worlds largest social game developer and has both US and International locations. The companys major competitors by market capitalization are Google, Badu Inc., William Hill, and Groupon (Yahoo Finance, 2012).
Financial Facts from SEC Filings

Since Zynga Inc. is a brand new IPO from December 16, 2011 there is very little data filed with the SEC at this time beyond the Registration Statements and Beneficial Ownership forms. The companys fiscal year ended December 31, 2011 so formal filings of the Financial Statements have not yet been completed. The Fourth Quarter and Full Year 2011 results are set to be released February 14, 2012 according to the investor relations section of the companys website. Zynga did file a Form 8-K Current Report on December 21, 2011 that gives some insight into the structure of the companys stock offer however. According to the December 21, 2011 Current Report, Zynga is authorized to issue both common and preferred stock. The total number

Running Head: IPO PAPER - ZYNGA INC.

of common shares authorized to be issued is 2,020,517,472 shares and the total number of preferred shares authorized to be issued is 2,000,000 shares. The common stock is divided into Classes A, B, and C with varying voting rights by class. Both Classes B and C are convertible into Class A common stock (Zynga Inc., 2011). Financial information can be found online for the year ending 2010. Net income has steadily grown from a low of ($22.1M) in 2008 to $96M in 2010. The company has steadily increased its assets and its liabilities over the last three years. Cash flow from operations has also increased greatly from $11.5M to $326.4M (Bloomberg Businessweek, 2012). Since the company was private prior to December 16, 2011 however there is no comparative industry ratio data available.
IPO Information

Zyngas IPO date was December 16, 2011 and the initial share price was set to $10 per share (Owens, 2012). The estimated P/E multiple (using an estimated EPS of 0.1750) was 72.9714 (Bloomberg Businessweek, 2012). The number of shares sold on the IPO date was 100 million shares, which is 14% of the available shares. The company was expected to be valued at $10B after the IPO though a third party did suggest the number would be closer to $14.5B. The IPO was underwritten by a syndicate consisting of Morgan Stanley and Goldman Sachs as the lead investment banks, along with Bank of America Merrill Lynch, Barclays Capital, JP Morgan and Allen & Company (Hughes & Sherwood, 2011).
Success of the IPO

Although Zyngas shares were trading lower than their initial price for over a month after the IPO, Pincus has called the IPO a success (Inc. Wire, 2012). The goal to raise $1B in financing was met and new investors were brought in as was desired by the company.

Running Head: IPO PAPER - ZYNGA INC.

Other sources are not so convinced about the success of Zyngas IPO. The value of the company after the offering apparently dropped to $7B. Share prices also dropped to as low as $8 per share at one point. Some analysts blame Zyngas heavy reliance on Facebook as its main game platform, saying that the company is not diverse enough. More than 90% of Zyngas revenue comes from Facebook. Trading below initial price does seem to be a trend for internet and social media IPOs though as 19 of the 31 companies which have had an IPO since 2010 are currently trading below their initial price (Atkins, 2012).
Since The IPO

With the recent announcement of Facebooks IPO, Zyngas share prices have climbed back up over the initial price of $10. Facebook released that it receives 12% of its revenue from Zynga games on the social networking site. This number is exclusive of ad-revenue it receives from the ads surrounding the game content (Pham, 2012). The games allow the user to purchase items with Facebook cash. Those who want their items faster, have the option to purchase Facebook cash with real cash. Analysts are unsure why the Facebook IPO announcement is boosting share prices for Zynga and other internet companies such as LinkedIn. Zyngas shared climbed 26% in the two days after Facebook made the announcement. The year-to-date gain of the stock rose to 42% (MacMillan, 2012). Currently the stock is trading at $13.31, down a bit from the high of $14.44 per share. The P/E Multiple, using the same estimated EPS of 0.1750, has increased from its estimated value of 72.9714 to 76.0571. Options trading for Zynga shares are also up. Those who purchased options when the shares were trading below the initial price have already seen large gains in the value of their options. Traders are hoping that the increase in share price due to the Facebook IPO announcement continues to drive up the option price (Duffy, 2012).

Running Head: IPO PAPER - ZYNGA INC.

Stock Price Trend since the IPO

Zyngas stock price since the IPO dropped to a low of $8 per share from the initial $10 per share offering, and then rose to hover between $9-10. Finally on January 30, 2012 the stock price recovered to greater than the initial price and has stayed there since bolstered by the Facebook IPO announcement.

Figure 1: Stock price trend since IPO

Financial Data
Historical Prices since IPO Date
Prices

Date Feb 3, 2012 Feb 2, 2012

Open 12.97 11.05

High 14.44 12.91

Low 12.75 10.84

Close 13.39 12.39

Volume 55,612,800 59,164,300

Adj Close* 13.39 12.39

Running Head: IPO PAPER - ZYNGA INC.

Feb 1, 2012 Jan 31, 2012 Jan 30, 2012 Jan 27, 2012 Jan 26, 2012 Jan 25, 2012 Jan 24, 2012 Jan 23, 2012 Jan 20, 2012 Jan 19, 2012 Jan 18, 2012 Jan 17, 2012 Jan 13, 2012 Jan 12, 2012 Jan 11, 2012 Jan 10, 2012 Jan 9, 2012 Jan 6, 2012 Jan 5, 2012 Jan 4, 2012 Jan 3, 2012

10.63 10.54 10.02 9.45 9.73 9.96 9.03 9.15 8.70 8.75 9.20 9.10 8.43 8.33 8.55 8.11 8.53 8.93 9.10 9.49 9.52

10.65 10.64 10.51 10.25 9.73 10.00 9.90 9.19 9.19 8.75 9.20 9.40 8.99 8.46 8.57 8.59 8.61 8.99 9.15 9.49 9.64

10.39 10.10 10.02 9.40 9.20 9.48 9.01 8.75 8.55 8.50 8.52 8.93 8.35 8.24 8.21 8.06 7.97 8.45 8.82 9.12 9.40

10.60 10.49 10.39 10.05 9.52 9.53 9.71 9.12 9.09 8.53 8.65 9.22 8.87 8.45 8.33 8.53 8.00 8.81 8.91 9.19 9.45

6,345,400 6,949,500 12,114,300 14,881,400 5,480,800 7,969,200 11,583,500 4,710,700 6,336,600 3,957,200 6,548,100 4,855,100 5,033,500 2,936,800 3,101,900 4,884,800 9,779,100 8,445,200 9,716,100 4,299,400 3,995,400

10.60 10.49 10.39 10.05 9.52 9.53 9.71 9.12 9.09 8.53 8.65 9.22 8.87 8.45 8.33 8.53 8.00 8.81 8.91 9.19 9.45

Running Head: IPO PAPER - ZYNGA INC.

Dec 30, 2011 Dec 29, 2011 Dec 28, 2011 Dec 27, 2011 Dec 23, 2011 Dec 22, 2011 Dec 21, 2011 Dec 20, 2011 Dec 19, 2011 Dec 16, 2011

9.29 9.43 9.82 9.34 9.43 9.65 9.24 9.15 9.50 11.00

9.43 9.57 9.82 9.82 9.47 9.65 9.57 9.38 9.60 11.50

9.19 9.32 9.39 9.32 9.27 9.25 9.15 9.08 8.75 9.00

9.41 9.37 9.50 9.75 9.39 9.47 9.47 9.24 9.05 9.50

5,522,300 2,512,100 2,270,000 3,238,500 2,655,300 2,986,200 5,069,400 8,358,800 18,394,000 116,817,000

9.41 9.37 9.50 9.75 9.39 9.47 9.47 9.24 9.05 9.50

* Close price adjusted for dividends and splits.

Income Statement
Currency in Millions of s Revenues TOTAL REVENUES Cost of Goods Sold GROSS PROFIT Selling General & Admin Expenses, Total R&D Expenses OTHER OPERATING EXPENSES, TOTAL As of: Dec 31 2008 19.4 19.4 8.1 11.3 12.8 12.2 25.0 Dec 31 2009 121.5 121.5 56.7 64.8 66.5 51.0 117.5 Dec 31 2010 597.5 597.5 176.1 421.4 185.8 149.5 335.3

Running Head: IPO PAPER - ZYNGA INC.

OPERATING INCOME Interest and Investment Income NET INTEREST EXPENSE Other Non-Operating Income (Expenses) EBT, EXCLUDING UNUSUAL ITEMS Gain (Loss) on Sale of Investments Other Unusual Items, Total Legal Settlements EBT, INCLUDING UNUSUAL ITEMS Income Tax Expense Earnings from Continuing Operations NET INCOME NET INCOME TO COMMON INCLUDING EXTRA ITEMS NET INCOME TO COMMON EXCLUDING EXTRA ITEMS

-13.7 0.3 0.3 0.2 -13.2 0.0 -8.9 -7.0 -22.1 0.0 -22.1 -22.1 -22.1 -22.1

-52.8 0.2 0.2 -0.1 -52.7 -0.1 ---52.8 0.0 -52.8 -52.8 -52.8 -52.8

86.1 1.2 1.2 2.1 89.5 -1.7 39.3 39.3 127.1 36.5 90.6 90.6 27.9 27.9

Balance Sheet
Period End Date Assets + Cash & Near Cash Items + Short-Term Investments + Accounts & Notes Receivable + Other Current Assets 187.83 550.26 79.97 88.15 12/31/2010

Running Head: IPO PAPER - ZYNGA INC.

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Total Current Assets + Net Fixed Assets + Other Long-Term Assets Total Long-Term Assets Total Assets Liabilities & Shareholders' Equity + Accounts Payable + Other Short-Term Liabilities Total Current Liabilities + Long-Term Borrowings + Other Long-Term Liabilities Total Long-Term Liabilities Total Liabilities + Total Preferred Equity + Share Capital & APIC + Retained Earnings & Other Equity Total Equity Total Liabilities & Equity

906.21 74.96 131.40 206.36 1,112.57

33.43 487.22 520.65 0.00 109.71 109.71 630.36 360.95 112.41 8.85 482.22 1,112.57

Cash Flows
All Values in Millions USD (except Per Share) Period End Date Cash From Operating Activities + Net Income + Depreciation & Amortization + Other Non-Cash Adjustments + Changes in Non-Cash Capital 90.60 39.48 -20.21 216.55 FY 2010 12/31/2010

Running Head: IPO PAPER - ZYNGA INC.

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Cash From Operations Cash From Investing Activities + Capital Expenditures + Other Investing Activities Cash From Investing Activities Cash from Financing Activities + Increase in Capital Stocks + Decrease in Capital Stocks + Other Financing Activities Cash from Financing Activities Net Changes in Cash

326.41

-56.84 -560.60 -617.44

352.92 -1.48 0.08 351.52 60.50

Conclusion
It is difficult to tell so soon after Zyngas IPO if it was actually a success. Initially, when the share price dropped as low as $2 per share under the initial price and remained under for over a month, it would have been easy to label it as a failure. Now however, with the recent gain in price due to the Facebook IPO announcement, that label might not stick so easily. At this point in time the share price is up to $13.31 per share. Even the initial investors have realized a gain. Those who purchased shares or options when the price per share was less than $10 have seen even more of a gain. The question is whether or not this increase in price can be sustained. Much will depend on Zyngas development going forward. If the company is able to diversify and develop sources of income other than primarily Facebook, the share price and return to shareholders should continue to grow. At this time, the Zynga IPO does seem to be a success and those who took advantage of its rather shaky start will benefit the most.

Running Head: IPO PAPER - ZYNGA INC.

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Bibliography
Atkins, M. (2012, February). Zynga IPO Fails To Impress. Retrieved February 6, 2012, from Financier Worldwide: http://www.financierworldwide.com/article.php?id=9018 Bloomberg Businessweek. (2012, February 6). Zynga Inc. Company Profile. Retrieved February 6, 2012, from Bloomberg Businessweek: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=ZNGA:US Duffy, C. (2012, February 12). Zynga Options On Fire After Facebook IPO Filing. Retrieved February 6, 2012, from Forbes: http://www.forbes.com/sites/greatspeculations/2012/02/02/zynga-options-on-fire-after-facebookipo-filing/ Hughes, A., & Sherwood, R. (2011, November 30). Zynga IPO Date Reportedly Set For December 15. Retrieved February 6, 2012, from Huffington Post Tech: http://www.huffingtonpost.com/2011/11/30/zynga-ipo-date_n_1121849.html Inc. Wire. (2012, January 18). Zynga Boss: IPO Was a Success. Retrieved February 6, 2012, from Inc. Wire: http://wire.inc.com/2012/01/18/zynga-boss-ipo-was-a-success/ MacMillan, D. (2012, February 6). Zynga Shares Jump After Facebook IPO Filing: San Francisco Mover. Retrieved February 6, 2012, from Bloomberg Businessweek: http://www.businessweek.com/news/2012-02-06/zynga-shares-jump-after-facebook-ipo-filingsan-francisco-mover.html Owens, J. C. (2012, January 27). Zynga stock closes higher than IPO price for first time. Retrieved February 6, 2012, from Mercury News: http://www.mercurynews.com/business/ci_19837758 Pham, A. (2012, February 1). Facebook got 12% of its revenue from Zynga. Retrieved February 6, 2012, from Los Angeles Times:

Running Head: IPO PAPER - ZYNGA INC.

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http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/02/facebook-gets-12-of-itsrevenue-from-zynga-s1-filing-ipo.html Yahoo Finance. (2012, February 6). ZNGA. Retrieved February 6, 2012, from Yahoo Finance: http://finance.yahoo.com/q?s=ZNGA Zynga Inc. (2011, December 21). Zynga - Current Report. Retrieved February 6, 2012, from Zynga - SEC Fililngs: http://investor.zynga.com/secfiling.cfm?filingID=1193125-11349015&CIK=1439404 Zynga Inc. (2012). About Zynga. Retrieved February 6, 2012, from Zynga Inc.: http://company.zynga.com/about