Last updated: December 16, 2011 10:07 pm

Zynga shares fall 5% on trading debut

Shares in Zynga fell below their initial public offering price in first-day trading, despite the maker of FarmVille raising the most money for a US internet company since Google.

Trading on the Nasdaq opened at $11 a share, above its IPO price of $10, but fell to $9.50 by the closing bell, a decline of 5 per cent. That is a contrast to the big “pop” in debuts for Groupon and LinkedIn, and the reverse of the average 10 per cent first-day gain for US IPOs this year.

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Groupon, the online coupon seller, jumped 31 per cent in first-day trading, and LinkedIn, the social network, saw the biggest first-day “pop” for a US company this year at 109 per cent.

Zynga’s IPO valuation was also more restrained than past social networking offerings, pricing the company at some 11 times last year’s sales. LinkedIn and Groupon priced at more than 17 times previous-year sales.

The offering of 100m shares, raising $1bn and valuing the four-year-old company at $7bn, was the biggest sale for a US internet group since Google’s $1.9bn offering in 2004, according to Dealogic. It caps off a year that saw social networking and web groups debut despite extraordinarily volatility in capital markets that shut the IPO route to most other sectors.

The Zynga deal was hotly anticipated following the successful offering for LinkedIn, the social network for professionals, and $100bn valuations in private markets for Facebook, the social network that is the main platform for Zynga’s games such as CityVille and Mafia Wars.

But a surge in volatility stemming from the eurozone crisis led Zynga and Groupon to delay their offerings until the last two months of the year.

Since the summer, recently listed internet companies have broadly fallen below their peak levels as investors became less comfortable with their valuations and worried about a flood of secondary offerings by venture capital firms that could further depress prices.

Zynga’s in-range pricing – the company had sought to sell shares between $8.50 and $10 – surprised some analysts, who had expected the profitable company to see stronger demand.

“We thought it would price at the top or above. The fact that it priced above-range reflects broader market volatility and the fact that investors are becoming more risk averse,” said Stephanie Chang, analyst at Renaissance Capital, an IPO research and investment firm.

However, she said: “I don’t think the trading will necessarily replicate what Groupon and other recent deals have experienced,” citing Zynga’s profitability and more developed business model.

”Zynga has a tangible revenue stream in place and currently working, as opposed to Groupon,” said Jeff Sica, chief investment officer of Sica Capital Management.

“I would be a little hesitant, however, because they do not have strong barriers to entry,” said Mr Sica, but added that “they are still the premier name in the industry and will continue to be”.

Zynga sold 14 per cent of its shares in the offering, which is more than Groupon and in line with LinkedIn, but still below the average since of 25 per cent for tech deals since 2000, according to Ipreo, a capital markets advisory firm.

The company plans to use the proceeds of the offering for game development and marketing as it seeks to expand its reach. Games such as CityVille and Mafia Wars are primarily played via Facebook, but the company is seeking to widen this to mobile devices and tablets, and push several in-development games to market.

No pre-IPO investors sold shares in the offering, although Mark Pincus, chief executive, retains 37 per cent of the voting power via class B and C shares he owns. The offering was of class A shares.

Though the US IPO market this year is on track be about 50 per cent smaller than it was in 2007, tech IPOs are running on a pace roughly equal to pre-crisis levels, with $10.5bn expected to be raised in 42 deals, according to Bank of America Merrill Lynch.

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