Red hot games stock: Zynga heads for $20bn market float

Founded just four years ago, the fast-growing online gaming company, made profits of just under $91m last year
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The Independent Online

Wall Street is taking a deep breath this weekend after the announcement of one of the most hotly anticipated US stock market listings in years.

After months of speculation, Zynga, the hugely profitable social gaming company, finally filed proposals for a flotation at just after noon in New York on Friday.

Lou Kerner, vice-president of equities research at Wedbush Securities, stated: "This is a great candidate for an initial public offering [flotation]," he said. "Zynga has tremendous growth and profitability."

Zynga, based in San Francisco, predominantly makes games for Facebook and is looking to raise up to $1bn (£0.6bn) by floating a small stake in the business. Although the management team, led by its 45-year-old chief executive Mark Pincus, did not state how many shares would be on offer, reports earlier in the week suggested that they hope this will value the company at up to $20bn.

The filing at the US Securities and Exchange Commission shows how fast-growing the company has been since it was founded four years ago.

In 2008, revenue was less than $20m, compared to just under $600m in 2010, with profit after tax at $90.6m, having been loss-making in previous years. The games are free to play, but make money by selling virtual goods to players during play as well as from advertising. Starbucks has a virtual coffee shop in the CityVille game.

In the opening letter to the prospectus, Mr Pincus said that Zynga was looking to make between $100m to $150m of capital expenditure this year, and added: "My kids decided a few months ago that peek-a-boo was their favourite game. While it's unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon.

"When they enter high school, there's no doubt that they'll search on Google, they'll share with their friends on Facebook and they'll probably do a lot of shopping on Amazon. And I'm planning for Zynga to be there when they want to play."

However, the prospectus makes clear the business is heavily reliant on one major vendor, Facebook.

"If we are unable to maintain a good relationship with Facebook, our business will suffer," says the prospectus. In addition, a problem with Facebook's network would interrupt Zynga's operations. It is vital for Zynga to diversify and grow in the mobile phone gaming sector.

Zynga brings together some of Silicon Valley's biggest brains. William "Bing" Gordon, the co-founder of gaming giant Electronic Arts, is a director, as is the former Linkedin chief executive Reid Hoffman.

The best-known director is Jeffrey Katzenberg, who joined the board in February, the man who co-founded DreamWorks Studios with Steven Spielberg.

Brian Reynolds is chief games designer. He is behind last year's hit Zynga game FrontierVille, which is set in America's Old West.

Due to Zynga's tight relationship with Facebook, analysts and Wall Street watchers will be poring over the prospectus to glean any hints about the social media giant's operations. Facebook is itself expected to float next year, making founder Mark Zuckerberg billions in the process.

Harvard-educated Mr Zuckerberg was also in the news as he promised to "launch something awesome" this week. There is speculation this could be an application for Apple's iPad.

Certainly, Facebook is under pressure to come up with a big new idea after Google's direct challenge to the social network last week. The search engine launched Google+ and has called for developers to make programmes and applications for the new venture.

These were not the only headline-making events in the social networking sector last week, which shows how dominant it has become in 21st-century business. One of the co-founders of Twitter, 37-year-old Biz Stone, said he was stepping down from day-to-day involvement and returning to technology start-ups.

One of the social networking pioneers, though, served as a warning to the sector. Rupert Murdoch's News Corp sold MySpace last week for just $35m, having paid $580m in 2005.

The buyer is Specific Media, and the singer-turned-actor Justin Timberlake will be the frontman as the site's new creative director. Mr Timberlake was one of the leads in The Social Network, the critically acclaimed film about the origins of Facebook, which was released last year.