David Paul Morris/BloombergZynga Inc., maker of the popular social networking games Farmville and Cityville, filed paperwork for an initial public offering Friday.Zynga Inc., the social-gaming company known for “FarmVille” and “Texas HoldEm Poker,” filed to raise US$1 billion in an initial public offering, letting investors bet on the surging market for virtual goods.
The IPO will be managed by Morgan Stanley, Goldman Sachs Group Inc., Bank of America Corp., Barclays Plc, JPMorgan Chase & Co. and Allen & Co., according to a regulatory filing today. The San Francisco-based company didn’t say how many shares it would sell or at what price.
Zynga, which leads the market for games played on Facebook Inc.’s site and other social networks, is joining the biggest wave of Internet IPOs since the dot-com heyday in 2000. LinkedIn Corp., Pandora Media Inc. and Yandex NV all went public in the past two months, and other Internet companies such as Groupon Inc. aim to benefit from the rebound with their own IPOs.
“Investors are going to be very interested in it,” said Kathleen Smith, a principal at Renaissance Capital LLC, an IPO research and investment firm in Greenwich, Connecticut. There still aren’t many social media stocks, she said, and the IPO lets investors bet on the growth of Facebook, which is closely held. “People look at it as a proxy for Facebook.”
Zynga said it has more than 232 million monthly active users, making it the biggest developer of social games. The company owns the four most popular apps on the Facebook’s site: “CityVille,” “Empires & Allies,” “FarmVille” and “Texas HoldEm Poker,” according to research firm AppData.com.
Soaring Sales
Revenue in the first quarter more than doubled to US$235.4 million, from US$100.9 million a year earlier. Net income climbed 83% to US$11.8 million. The company spent a combined US$111.9 million in the period on research and development and sales and marketing.
Sales surged almost fivefold in 2010 to US$597.5 million, and the company turned profitable, recording net income of US$90.6 million, following a loss of US$52.8 million in 2009.
“Substantially all” of Zynga’s revenue comes from games on Facebook, according to the filing. Facebook, the world’s largest social network, takes 30 percent of sales of virtual goods. Zynga also has developed games for Apple Inc.’s iPhone and iPad, Google Inc.’s Android phones and Yahoo! Inc.
“Any deterioration in our relationship with Facebook would harm our business,” the company said in the filing.
IPO Resurgence
Fifty-three Internet companies have filed for U.S. IPOs so far this year, the most since 164 companies in the industry announced plans for initial offerings in the U.S. during all of 2000, data compiled by Bloomberg show.
Zynga’s games are free to play, with the company making money by selling virtual goods — say, a tractor for “FarmVille” — and letting players pay to reach higher levels. The worldwide virtual-goods market will more than double to US$20.3 billion in 2014, from US$9.28 billion last year, according to ThinkEquity LLC, a San Francisco-based research firm.
Chief Executive Officer Mark Pincus, 45, is the biggest owner, controlling 16% of Class B shares, according to the filing. Kleiner Perkins Caufield & Byers owns 11 percent and is the largest outside shareholder, followed by Institutional Venture Partners, Foundry Group and Avalon Ventures, which each own 6.1%.
Digital Sky Technologies, started by Russian billionaire Yuri Milner, owns 5.8%, and Union Square Ventures has 5.5%. Pincus, who founded Zynga in 2007, owns all of the company’s Class C stock.
Zynga, which plans to use the IPO funds for general corporate purposes, didn’t say what exchange the shares would trade on or what ticker the company would use.
Acquisition Spree
Zynga has acquired at least 10 companies in the past year, helping it expand beyond Facebook games and into smartphone apps. The company bought Newtoy Inc., the maker of “Words With Friends,” in December. Four months later, it acquired Wonderland Software, creator of the game “GodFinger.”
Zynga is valued at US$15.4 billion on SharesPost Inc., an exchange that connects buyers and sellers of privately held companies. That would make it the most valuable U.S. game company, ahead of Activision Blizzard Inc. and Electronic Arts Inc. Zynga recently hired former Electronic Arts Chief Operating Officer John Schappert for a senior role.
“We’re at the very beginning stages of this social gaming revolution and Zynga is the market leader,” said Lou Kerner, an analyst at Wedbush Securities Inc. in New York.
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