Zynga Shows Street Smarts With IPO Plan

[Though Zynga's upcoming $1 billion IPO is lower than expected based on previous reports and market cap valuations, Gamasutra's Chris Morris explains why the company is playing it smart with its low share prices.] Five months after announcing its intention to go public, Zynga is about to make the splash, but it's doing so with a much smaller splash than most people expected back in July. Back then, when the market was teasing investors with a head fake of stability, analysts, and the financial media (along with most of the gaming industry) expected the company to raise between $1.5 and $2 billion – with an accompanying market cap of $15 billion and $20 billion. But when shares begin trading Dec. 16, the company will only seek $1 billion – and have a maximum market cap of $7 billion. That's prompted mutters of the offering being "disappointing" from some corners. That opinion, though, is ill-informed. Despite outside consultants pinning the company's estimated worth at twice that $7 billion estimation, Zynga opted to price shares at a low range hovering between $8.50 and $10. Thank market turbulence for that call. The recent slate of high profile tech IPOs haven't held up well since their splash debuts. Groupon is already below its IPO price – and Pandora, Zillow and LinkedIn are all well off their highs. Zynga's profitable, though, which is something not all of those companies can say. It made more than $90 million last year and is nearly $31 million in the black for the first nine months of this year. By keeping the price deliberately low, Zynga gives potential stockholders the impression that it's a company able to read the market – and swallow its pride, which can curry favor with many institutional investors. More importantly, it also reassures backers that they won't lose their shirt by buying in. There's no sign of calm waters ahead on Wall Street – and the combination of a low buy-in price and high external estimated value sends a message to buyers that Zynga is a relatively safe investment – a life preserver in the turbulent technological world. Whether that's true or not, of course, is an entirely different matter – but stock offerings are a lot like gaming: Marketing is often as important as the finished product when it comes to driving sales. Let's not forget, after all, that Zynga CEO Mark Pincus really isn't giving investors any say in how the company proceeds. He'll hold 70 times more voting power than all of the common stock that goes up for sale. That's something the company is trying to brush over during its Wall Street debut. Investors aside, Zynga could have an ulterior motive in keeping its IPO price so low. Last week, the New York Times published a stinging report about employee morale at the company, noting worker frustration was on the rise, due to long hours and stressful deadline periods. A large number of those workers were lured to Zynga by big stock option offerings. (Over the past few years, the company has reportedly been handing out options like the best house in the neighborhood at Halloween.) And with the public offering finally here, there's a significant concern that frustrated workers might simply cash out and abandon the company. Pricing the shares low could have one of two effects that ultimately affect the desertion rate. If buyers smell a bargain, given the external estimates of a higher net worth, share prices will soar that first day – and if they can hold that level for the mandatory 180-day waiting period, employees must sit out before they can cash out, it could lead to a bigger exodus. If, however, company shares settle in that area, a number of people planning on leaving might rethink those plans, as their payout won't be nearly as big as they might have expected. Any sort of talent drain, of course, would worry investors, but if the company's profits rise, that won't be something that's viewed as catastrophic and could keep the company's stock price high. So, while Zynga's IPO isn't quite the earth moving that was foretold, it's hardly anticlimactic. After all, the company's market cap will top all publicly traded video game publishers, with the exception of Activision-Blizzard. And it's pretty hard to make a case that the largest IPO by an online company since Google's 2004 Wall Street debut is disappointing, no matter how much you might hate FarmVille.