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Video Angry Birds maker eyes IPO Zynga's Mark Pincus Luluvise launches ladies-only networking Cat litter - the latest weapon in crime fighting Follow Reuters Facebook Twitter RSS YouTube Read Senate passes payroll tax cut and spending bill 4:38pm EST Rapper shot to death in Atlanta 4:15pm EST South Carolina has first human rabies case in 50 years 16 Dec 2011 Special report: the billionaire from Brazil | 9:11am EST Time short for S&P to end 2011 higher 12:00pm EST Discussed 249 Ron Paul gains ground, further stirring Republicans 135 Insight: The day Europe lost patience with Britain 126 Ron Paul strongly defends anti-war policies Watched Philippines counts storm dead 3:13am EST 'Barefoot Bandit' brought to book Fri, Dec 16 2011 Dozens die in Philippines storm 2:10am EST Zynga falters in debut, sheds doubt on IPO market Tweet Share this Email Print Related News Timeline: How Zynga became a $9 billion company Fri, Dec 16 2011 Analysis & Opinion Tech wrap: RIM under fire ahead of results M & A wrap: Zynga IPO: Bubbleville? Related Topics Tech » Deals » Global Deals Review: 2011 Q3 » Global Deals Review: 2011 Q2 » Global Deals Review » Inflows Outflows » Media » Facebook » Related Video Wall St ready to play with Zygna IPO Fri, Dec 16 2011 Zynga's $7B online game secrets WallStreetVille prepares for debut of Zynga shares Mark Who? U.S. Day Ahead: Game on for Zynga IPO Zynga CEO Mark Pincus and his wife Ali are shown after Pincus rung the opening bell of the NASDAQ exchange remotely from Zynga's headquarters on the day of the company's IPO in San Francisco, December 16, 2011. Credit: Reuters/Zef Nikolla/NASDAQ By Liana B. Baker and Alistair Barr NEW YORK/SAN FRANCISCO | Fri Dec 16, 2011 6:09pm EST NEW YORK/SAN FRANCISCO (Reuters) - Online games developer Zynga Inc scored badly as it went public on Friday, dashing hopes for the year's hottest tech IPO, as investors frowned on its over-reliance on Facebook, dimming growth prospects, and outsized control by CEO Mark Pincus. Zynga's stock fell 5 percent below its $10 initial public offering price to close at $9.50 on Nasdaq on Friday, dealing losses to IPO buyers used to racking up gains on a stock's first day of trading. Investors had eagerly awaited the IPO as a way to get a slice of Facebook's growth before the leading social networking website goes public, possibly in 2012. Zynga makes money on Facebook by selling virtual items such as jewelry and poker chips in its games such as "FarmVille" and "CityVille." At least one analyst said on Friday that some investors may have been turned off by Chief Executive Mark Pincus' large voting stake and control over the company. He has a special class of shares that grants him 37 percent voting power even though his equity stake is much lower, and public shareholders will have less than 2 percent of votes. "We believe that having a CEO/owner-controlled board is particularly dangerous for investors in young companies," said Cowen and Co analyst Doug Creutz. Creutz, who has a neutral rating on the stock, added that history is full of examples of CEOs who have built young companies but cannot manage them when they mature. Asked about his voting shares, Pincus told Reuters he decided to retain such huge control over Zynga because he believed from the start that he was the best person to lead the company. "Investors who want to see the company deliver long-term value are going to be better served by the fact that I can continue to ensure the company keeps its focus on the long term and we don't let short-term swings and opportunities reduce that," he said in an interview. Based on Friday's closing share price, the value of Pincus' holdings fell to $1.05 billion from $1.1 billion at the IPO price. Friday's flop stunned investors who had expected a strong showing because the company is profitable, unlike other recent high profile Internet IPOs such as Groupon and Pandora. "I was stunned when I saw this. This is a disaster for them. The way you're supposed to price deals is to give investors a 15 percent IPO discount to compensate them for the risk of backing a relatively new company," said Dan Niles, chief investment officer of AlphaOne Capital Partners, who did not buy shares. "It makes me wonder about the underlying health of the market. IPOs like this can change the whole tenor of the market," he added. Investors said Zynga's stock performance could hurt other private companies in the pipeline such as Yelp and even Facebook. Some investors regard Zynga's IPO as a proxy for Facebook, because 95 percent of its $828 million in revenue in the past nine months comes from Mark Zuckerberg's social network. "Now we have an exciting IPO and people don't want it and that's a big concern for when Facebook comes out," said Jeff Sica, president and chief investment officer of SICA Wealth Management. The cooling off in the IPO markets could hurt Facebook's estimated $100 billion valuation, BGC analyst Colin Gillis said. Zynga's reliance on the platform was supposed to attract investors looking to bet on Facebook's growth. With Facebook's IPO expected to be at least several months away, Zynga is one of the few indirect ways to bet on the website's future. Facebook takes a 30 percent cut of the revenue Zynga derives from the social network, which features more than 222 million monthly active Zynga users. Zynga CEO Pincus said he was looking beyond the share price drop and said the company went public at the right time. "We're going to focus on the products and business results we deliver in the next four to eight quarters and hope the stock market values and appreciates that as they see us deliver it," he said. In San Francisco, hundreds of employees got to work early to watch Pincus ring the bell to open Nasdaq trading and wore T-shirts saying "I love play" featuring the ZNGA trading symbol printed on the sleeves. Cinnamon buns and hot cocoa were served before the ceremony. CONCERNS WEIGH The company, which competes with Electronic Arts, sold 100 million shares of Class A common stock at $10 per share in the IPO, roughly 11 percent of its shares on a diluted basis, at the top end of the $8.50 to $10 indicative range. The IPO values Zynga at $8.9 billion. In November, the company had been valued at roughly $14 billion, according to an internal estimate in a regulatory filing. But that lowered valuation may still have been too rich for some, said Sterne Agee analyst Arvind Bhatia. Zynga's near $9 billion valuation is less than videogame maker Activision Blizzard Inc's $13.6 billion and higher than Electronic Arts Inc's $6.7 billion. In the last four quarters, Activision and Electronic Arts generated more revenue than Zynga. Analysts and investors have also expressed concern over how it profits from less than 3 percent of its players who buy items in its free games. Plus, its reliance on Facebook appears unhealthy to investors who want to see Zynga diversify its revenue sources. Pincus on Friday said the company's 13 million daily users of its mobile games is a good start, and doesn't trail its daily users on Facebook as much as people assume. Zynga had 50.5 million daily users on Facebook on Friday, according to AppData, a website which tracks Facebook applications. Yet Zynga's growth rate of bookings - the money it makes up front when users buy items, is slowing - which most analysts said is a red flag and could hurt Zynga's future revenue. Zynga is the second online games company selling virtual items to slip in its trading debut this week. On Wednesday, Nexon Co shares fell following its $1.2 billion IPO, which was Japan's biggest offering this year. At $1 billion in proceeds, Zynga's IPO is still the largest from a U.S. Internet company since Google Inc raised $1.9 billion in 2004. (Reporting By Liana B. Baker in New York and Alistair Barr in San Francisco) Tech Deals Global Deals Review: 2011 Q3 Global Deals Review: 2011 Q2 Global Deals Review Inflows Outflows Media Facebook Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (10) moneywon wrote: Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Advertise With Us Connect with Reuters Twitter Facebook LinkedIn RSS Podcast Newsletters Mobile About Privacy Policy Terms of Use Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests. NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

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