Why Did Zynga Tank After Facebook IPOed?

http://www.theatlantic.com/business/archive/2012/05/why-did-zynga-drop-after-facebooks-ipo/257395/

by mattobrien • 14 years ago

84 33 14 years ago

Interesting. I wonder what effect trading on Second Market had on FB's IPO. It could well be that people were gobbling up FB stock in expectation of the IPO pop. When that fizzled, they may well have dumped that stock, leading to the later depressed pricing.

Now, this is all contingent upon how much stock was being moved on SM, and the blackout period I suspect was in place preventing its trading. Still, I'd be interested in an analysis of SM's impact.

coryl• 14 years ago

I don't think anyone in the startup/tech world believes in Zynga's ability to be a (public) company that can seriously grow revenues and create sustainable products.

dmvaldman2• 14 years ago

Can you explain why?

luser001• 14 years ago

I'll try: they're sharecroppers (e.g., http://www.tbray.org/ongoing/When/200x/2003/07/12/WebsThePla...)

dbkbali2• 14 years ago

There is another possibility and that is dealers were desperately trying to maintain facebooks price above the Ipo price, especially given the significant lower fees taken on this Ipo and the greenshoe option. Without this dealer intervention it is possible facebooks price would have correlated more with zynga's price short. The greenshoe option http://en.wikipedia.org/wiki/Greenshoe could also have something to do with these trading patterns. Given facebooks stock performance this is not positive for future Internet IPOs.

mikeryan• 14 years ago

um, they said that in the article.

tatsuke952• 14 years ago

This isn't a "possibility", it's the duty of the underwriter.

dbkbali2• 14 years ago

The underwriter has no legal obligation or "duty" to guarantee or support the original issue price. Definitely, they have an economic and business incentive to ensure the price stays above the issue price. Failure to keep the IPO above this price could lead to a loss of credibility with their large institutional buyers and also with the issuer and their participation in future IPOs.

hristov3• 14 years ago

The reason is obvious to me. In fact it is so obvious now that I am kicking myself for not finding a way to make money out of it.

It is related to the reasoning proferred by the Atlantic, but it is not exactly it. It is true that Zynga and facebook are very related. And for that reason, it seems to me that a lot of Zynga shareholders were holding Zynga shares not because they want to own Zynga, but because they want to own Facebook and there was no way to buy Facebook on the public markets until today.

So a lot of Zynga shareholders were merely holding Zynga as a proxy for Facebook. Once Facebook was offered all those people decided to sell Zynga to buy Facebook. And Zynga tanked accordingly.

Now of course you will ask, why did Facebook seem to tank at the same time. If my theory about Zynga was true would that not mean that Facebook should go up as Zynga tanks. Yes, if all other things are equal. But in this case they were not. Facebook went down for a different reason. The reason Facebook went down is the usual immediate post IPO sell-off when a bunch of people that got into the IPO sell their shares immediately to make some quick profit.

So yeah, I wish I had thought about that yesterday.

hristov3• 14 years ago

To further support my theory, I note that LinkedIn also fell today by 5.6%. This was not a fall as steep as that of Zynga, but of LinkedIn is not as closely intertwined with facebook as Zynga.

jarek• 14 years ago

GOOG dropped by 3.6%, that's around $7.1B in market cap which is almost half of the entire Facebook offering - do you suppose this was driven by people who really wanted Facebook exposure, too?

dmvaldman2• 14 years ago

Hindsight bias:

http://lesswrong.com/lw/il/hindsight_bias/

justDance83• 14 years ago

interesting link.

tatsuke952• 14 years ago

>"So a lot of Zynga shareholders were merely holding Zynga as a proxy for Facebook. Once Facebook was offered all those people decided to sell Zynga to buy Facebook. And Zynga tanked accordingly"

If people were holding ZNGA as a proxy for FB, with the intention to dump the shares for FB when it went public, then these people should have known that others would be doing the same. Thus, they should have started earlier. I think this theory explains the flash crash, but not the bigger picture.

>" The reason Facebook went down is the usual immediate post IPO sell-off when a bunch of people that got into the IPO sell their shares immediately to make some quick profit."

A stock transaction is a two-way street. There is a buyer on the other end of the deal, you don't sell shares into a vacuum. So, selling the shares doesn't drive down price, lack of demand does.

aleyan• 14 years ago

I subscribe to your hypothesis that people were trading Zynga as a proxy for Facebook. The fortunes of Zynga are highly dependent on Facebook, and when big daddy was going down today so was Zynga.

As for making money on this, no dealers had shares available to sell short this morning or the past few days I believe.

nullspace• 14 years ago

>So a lot of Zynga shareholders were merely holding Zynga as a proxy for Facebook.

This might be a part of the reason. But the big huge fall, then the huge rise might just be triggered by silly trading algorithms, maybe?

Like you said, Zynga and Facebook are presumed to be highly correlated in terms of value. But, Zynga needs facebook more than the other way round. I think (and this may just be utterly wrong), that the steep fall in facebook's value triggered an even steeper fall in Zynga's share price, which then cascaded to panicked investors selling their shares to lower it even more.

The real funny thing however, is the steep rise again. I am tempted to venture a guess that everyone was watching the trades to see who would make the first move, and then piggyback on them.

Sort of like a room full of people with guns pointed at each other. No one really wants to make the first move, but as soon as someone does, the only chance of surviving would be to start shooting.

samwilliams2• 14 years ago

While this is a nice theory in principle, I think it falls down because of the timing of the ZNGA drop. The drop happened exactly when the FB shares were made available to trade (11.30 - 11.38), before this time they had been trading fine (in big volumes). You would expect the people that were holding these shares as a proxy for FB to have anticipated that others like them would have wanted to sell that morning and done so before the moment arrived. In fact, there is evidence that this did happen in that there was big movement of ZNGA in the first hour of trading and at around 10.50.

This means that is was much more likely that it was down to bad trading algorithms. Or that is how I see it anyway...

ArchD3• 14 years ago

If you were an ZNGA owner who's also interested in FB, you won't necessarily sell ZNGA before actually buying FB, because you don't actually know that you can get FB at a price acceptable to you until trading opens. In other words, human beings could contribute to the ZNGA price, not just trading algorithms.

n2dasun• 14 years ago

I think hristov's theory holds up just fine. I think the initial drop was short sales by people anticipating that exact situation.

panarky3• 14 years ago

It's always obvious in hindsight.

If Facebook shares had tripled today, that would also have been obvious after the fact.

If Facebook triples on Monday, you will kick yourself for passing up the once-in-a-lifetime opportunity to buy at the IPO price of $38.

And if the Facebook debacle continues and craters the entire market, we will see that all the warning signs were there, if only we could have recognized them in advance.

obiterdictum• 14 years ago

The reason Facebook went down is the usual immediate post IPO sell-off when a bunch of people that got into the IPO sell their shares immediately to make some quick profit.

Is this one correct, though? I recall that insiders have selling restrictions for 180 days after the IPO date.

jonnathanson• 14 years ago

Lock-up periods only apply to those holding a majority of stock (i.e., Zuckerberg), or to insiders who held a significant portion of stock prior to the filing of the IPO. Company employees typically fall into this category, too, even if their holdings aren't enormous, because they're insiders.

The lock-up doesn't necessarily apply to people who got in at the IPO, such as during the roadshow period. Also pretty sure the lock-up doesn't apply to people who bought private shares in secondary markets, such as the Goldman clients who bought in when Goldman offered private stock about 6 months ago.

panarky3• 14 years ago

We know that Morgan Stanley propped up Facebook's share price to keep it from falling below $38.

To prop up the price, Morgan had to buy a truckload of shares.

How else would you hedge your exposure to all those Facebook shares than to short Zynga and Google?

vibrunazo• 14 years ago

> We know that Morgan Stanley propped up Facebook's share price to keep it from falling below $38.

Why exactly do they wanna do that? If they're artificially holding it up, doesn't that mean they'll lose a lot of money in the next weeks when it goes back to an non-artificial price?

panarky3• 14 years ago

Here's why:

"Buyers did not rush into the market to snap up shares of the social networker. And the big Wall Street banks that brought Facebook public scrambled to prevent the stock from collapsing into declines."

"The underwriters averted a potential debacle by scooping up shares of the company during the Nasdaq debut. This propped up the stock, keeping it above the $38 offering price through most of the day."

“When a deal gets priced and breaks price on the first day, that’s definitely a major embarrassment," said trader Andrew Frankel, co-president of Stuart Frankel & Co.

"The practice is pretty standard during IPOs, especially high-profile ones like Facebook. The big banks buy into a wave of selling as a way to prevent their customers from suffering big losses."

Source: http://www.latimes.com/business/technology/la-fi-tn-facebook...

peterjancelis• 14 years ago

Such a prop up guarantee is probably part of the underwriting deal these investment banks signed. Morgan Stanley was the lead in this IPO deal.

ArchD3• 14 years ago

I think this article got many points right, but it failed to mention that ZNGA trading got halted, which could largely explain the semi-recovery of the price. You don't need to invoke the computer algorithms argument to explain that.

Dzidas• 14 years ago

It looks like pair trading.

Why Did Zynga Tank After Facebook IPOed?

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