Zynga is Going Public Before Facebook!

Another day, another idea to make one Million Euros in less than 5 years, another experience of Victory, at the black jack table a few weeks ago it was a Victory that got me closer to my objective, more summer celebrations enjoying the daily job at it's best and another report suggesting that another rapidly-growing web company could be about to strike it rich again. This time it’s the Wall Street Journal, suggesting that Zynga is out to raise a new $250 million round of funding (one that comes on top of the $500m it already has). It would, the report suggests, value the company at $7 billion.

That could be big news: Zynga’s been on a tear recently, buying out social browser Flock and New York’s Area/Code. But this latest morsel is likely to raise all sorts of questions. Is the company worth that much? Does it have the legs to continue growing at the same pace? What would new investors want to see? And, inevitably, are we seeing a bubble inflate? The bubble is more than Obvious my advise would be to stay on the Winning side of the spectrum

Those are all valid concerns, but I think the questions that potential investors should focus on are the ones around the company’s most pressing dilemma: its relationship with Facebook.

The two services have gone through their ups and downs, there is undoubtedly a symbiotic relationship between them. Zynga couldn’t exist without Facebook, which has given titles like Farmville and Mafia Wars a platform to succeed I have to mention that I even stopped playing Maffia wars 6 months ago when I realized that the more I conquer the more they create to keep me wasting my time, time that is of most value when tradding in the real world. And while Facebook might not like to admit it has been boosted by Zynga’s efforts, the levels of engagement that social games bring to it are financially important, both in terms of advertising and virtual currencies.

There’s little doubt that without each other, the two businesses would be smaller than they are today.

So then you start to wonder whether Zynga can — or should — float before Facebook does. How much of its value would be tied up in a private pseudo-parent? How much effort should it put into moving away from Facebook? This theoretical round of funding will no doubt generate speculation about a potential stock market flotation, not least because other outfits such as LinkedIn and Pandora are both winners on the real game. But until the relationship between Zynga and Facebook is clearer, it’s difficult to know what dangers the company and its investors could expose themselves to on the public markets.

This is made even more complex because waiting for Facebook may be trouble in and of itself. Few months ago it was pointed out that Mark Zuckerberg and his pals are considering a private share issue and don’t seem in any rush to go public.

That leaves Mark Pincus and Zynga’s board of directors in a strange position. What if they leave it too long to make a decision? I’m not sure what the answer is, or what the outcome would be. Any ideas? Feel free to leave them in the comments or send me an e mail.

Linked in First Trade, $175 million gift

LinkedIn, which was founded in 2003. has begin trading its shares, under the symbol LNKD, on the New York Stock Exchange this morning. As we learned yesterday, LinkedIn priced its IPO at $45 per share, giving the company a valuation of $4.5 billion. Today, the company began trading at $83.00 per share, a 84 percent increase from $45 per share. That’s a $7.8 billion market cap. It’s now up to $90 per share, LinkedIn is offering a total of 7,840,000 shares and is looking to raise as much as $406 million in the offering. Currently there are 94.5 million shares outstanding plus 1,176,000 shares to cover over-allotments. If the company sold the over allotment, LinkedIn’s valuation could be as high as $8.5 billion.

This is the the biggest U.S. Internet IPO since Google. Yes, that’s right. LinkedIn, which barely made $15 million in earnings last year, is worth about $8.5 billion.

Let me be more clear on this, LinkedIn’s IPO, which priced last night at $45 a share, now has doubled in early trading, up to $90 a share.

LinkedIn's underwriters, Morgan Stanley, Bank of America, just fooled the company and its shareholders to the tune of an astounding $175 million. By wildly underpricing the deal and selling LinkedIn's stock to institutional clients way too cheaply.

LinkedIn's stock was trading above $80+ a share earlier this morning. Bank of America and Morgan Stanley sold the same stock to their best institutional clients at $45 a share last night. The value of LinkedIn-the-company, it seems safe to say, has not appreciated by 90%+ in the past 12 hours. And that means that, on its underwriters' advice, LinkedIn sold its stock way too cheaply. It also means that the institutional investors who bought LinkedIn's stock last night are high-fiving each other this morning, celebrating their instantaneous 90% gain. (Lots of them are probably also selling some stock).

By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million this morning. And that money came right out of LinkedIn's pockets and the pockets of the LinkedIn shareholders who sold on the deal.

(Specifically, assuming a fairer price for the stock would have been about $60, LinkedIn probably left about $130 million on the table. LinkedIn's selling shareholders, meanwhile, left about $50 million.)

And the best part of this screwing is the fact that LinkedIn probably has no idea it got screwed. In fact, the company is probably thrilled with the IPO result. Why? Because they've been told for so long, by so many people, that having a big "first day pop" is what every company should pray for in their IPO.

But it isn't.

Here's a simple analogy:

Imagine if the trusted real-estate agent you hired to sell your house persuaded you to sell it to her best client for $1,000,000 by telling you this was the best price she could get. And then, the next morning, the person who bought your house immediately turned around and sold it for $2,000,000 (using the agent to sell it, naturally).

And it's also true that underwriters should always try to modestly underprice deals, to the tune of a 10%-15% "IPO discount." They do this to reward institutions for taking the risk of analyzing and buying the stock of an unproven company. If there were no discount on IPOs, there would be little incentive for big investors to play ball before the offering: They'd just wait until the stock started trading and buy it then. This, in turn, would make it harder for companies to raise capital. So the modest discount, in which companies and underwriters reward investors with a good deal, makes sense.

But there's a huge difference between at 10%-15% IPO discount and a ~50% discount, which is what LinkedIn's IPO just sold for. The institutions that bought the LinkedIn stock last night are now 100% richer, just by virtue of being good clients of BOFA and Morgan. And that money came right out of the pockets of LinkedIn and the LinkedIn investors who sold on the deal.

If LinkedIn can sustain a price above, say, $75 a share, BOFA and Morgan should have sold it to institutions at $60. Because the stock was instead sold at $45, LinkedIn and its existing investors just got screwed to the tune of $175 million.

While this makes LinkedIn look like the greatest thing there are a couple of huge caution flags in this monster opening jump, One, the underwriters left a LOT of money on the table. Given this level of demand for LinkedIn stock, this IPO could have been priced much, much higher.

That would have meant more money into the coffers of LinkedIn, rather than into the pockets of the investment community. At $90 a share, LinkedIn and its selling stockholders would have raised $705 million rather than $352.8 million.

Second, the LinkedIn stock debut must raise huge questions about the private markets for selling shares in LinkedIn, Facebook, Twitter and other non-public companies. Shares of LinkedIn on those thinly traded markets such as SharesPost valued the company at $2.5 billion. If the private market valuations are off by so much, how much can we trust them?

This is the perfect scenario to see if a new bubble is being created or if it pays off to be a big client of Morgan and BOFA, at the end of the line, clients will always keep coming back for more.I really want to see the happy ending of this until then... keep writting, keep investing, 1 Million euros in less than 5 years let's make it happen.