Zynga's stock, which debuted at $10 a share in December, is up 34% since… (Mark Lennihan, Associated…)
Zynga Inc., the maker of online social games FarmVille and Words With Friends, will seek to raise $400 million in a secondary public stock offering and rejigger when employees can sell their shares. The moves are designed to help prevent a sudden drop in the price of the San Francisco company's stock.
In December, Zynga took in $1 billion in its initial public offering with an eye toward financing an ambitious strategy to expand its products both internationally and to mobile devices.
This time, however, the offering is meant to serve an entirely different purpose: to shore up Zynga's shares and stabilize the price.
Until now, Zynga employees who have vested stock options and awards had been barred from selling or trading their shares until May 28. At that point, they would have been free to cash in. And that's exactly what worries the company. Zynga had 2,846 employees at the end of 2011, according to its last public disclosure.
Zynga officials are concerned that the stock price would plummet from the shock of so many employees selling their shares at the same time, according to a note to investors from Michael Pachter, an analyst with Wedbush Securities.
The solution is to let employees start selling their shares in staggered groups, so that not all of their stock hits the market at once. Zynga, in its filing with the Securities and Exchange Commission on Wednesday, said employees who participate in the secondary offering can choose to sell some of their shares at the end of April, another portion July 6 and the remainder Aug. 16.
A second solution involves the $400-million stock offering. Those selling in this round include early investors and other major shareholders in the company. Allowing them to sell additional shares widens the pool of publicly traded stock, which currently stands at 100 million shares, or about 14% of the company, and provides a bigger cushion against a potential mass sell-off of employee stock.
The move raises several questions about Zynga. First, should investors buy into the new round? Zynga's stock, which debuted at $10 a share in December, closed at $13.35 on Wednesday, down 3 cents from Tuesday but up 34% from its IPO.
Pachter said the stock could go higher in the next year — to as much as $17 a share.
Another question is what will those employees do once they're able to cash in their Zynga chips? Will they stay with the company or move on to harvest their crops in greener pastures?
"There will be some churn in employees any time a company goes public," said Billy Pidgeon, an analyst at M2Research. "But Zynga has tried to mitigate that by aggressively hiring talent and acquiring small developers."