Zynga revving up for IPO road show?

Social gaming company reportedly planning mid-December initial public offering

Online games maker Zynga will be hitting the road next week to stoke investor interest in its initial public offering tentatively scheduled for mid-December, said people allegedly in the know who don't like to get quoted by name.

Bloomberg reports that "two people briefed on the matter" say Zynga is shooting for a valuation as high as $10 billion:

Zynga plans to raise about $900 million by selling shares at about $8 to $10 apiece, said one of the people, who asked not to be identified because the plans haven’t been made public. Zynga would sell 10 percent or fewer of its outstanding shares, which are scheduled to be priced on Dec. 15, the person said.

Meanwhile, the Wall Street Journal writes that Zynga "is expected to launch its IPO road show next week."

The San Francisco-based company's IPO is being managed by Morgan Stanley and Goldman Sachs Group, both of which managed Groupon's recent successful IPO.

Successful, that is, if you were one of the insiders dumping shares on Day 1 for a big profit. Not so successful if you were one of the early public buyers who expects your investment to pay off in the near future, if ever. Shares of Groupon (NASDAQ: GRPN) were trading at 17.78 early Thursday, down 43% from 31.14 high they reached when the company went public on Nov. 4.

As I wrote recently, Groupon shares face downward pressure because the daily-deals site continues to lose money even as revenues soar. Groupon's growth also shows signs of slowing and competitors are crawling out of the woodwork to enter the low-barrier online discount market.

Zynga has a better -- though hardly perfect -- story to tell Wall Street. First, it's profitable. Zynga early this month reported $30.7 million in net income for the three quarters ended in September, down from $47.6 million in the year-ago period. In addition, revenue for the first nine months of this year was $828.9 million, more than double the $401.7 million a year ago.

But the maker of games such as FarmVille, CityVille and Mafia Wars has a potential Achilles heel: Its heavy dependence on Facebook. "Currently, substantially all of our revenue is generated from players accessing our games via the Facebook platform," Zynga said in a recent S-1 filing.

Let's put some numbers on "substantially all of our revenue": In the third quarter, 93% of Zynga's revenue came from its Facebook games. And, as Bloomberg points out, "That number has ranged between 91 percent and 94 percent since the beginning of last year."

Zynga is working on reducing its dependence on Facebook by producing more mobile games and games geared for other platforms, but even it concedes, "If we are unable to maintain a good relationship with Facebook, our business will suffer."

At this point, that'd be putting it mildly.

There are other risks, which I noted shortly after Zynga filed its IPO plans on July 1. There's the company's dependence on a small number of games for revenue. Another is its heavy dependence on get-a-lifers. "A small percentage of our players account for nearly all of our revenue," Zynga wrote in its initial S-1 filing.

One way Groupon and Zynga are similar is that upper management for each company has come under post-filing scrutiny from analysts and the media. In Groupon's case, CEO Andrew Mason and other executives were criticized for arguably violating the Securities and Exchange Commission's "quiet period" rules, raising questions about their judgment. Those kinds of concerns about management can unnerve investors.

And Zynga CEO Mark Pincus early this month was criticized (by myself, among others) after the Wall Street Journal wrote:

Early last year, as Mr. Pincus began preparing to take Zynga public, he and several other executives decided the company had doled out too many stock rights to certain people in its early days, say people familiar with the matter. The executives chose an unusual solution: They began demanding that certain employees surrender some shares or be fired.

None of which bothers Wall Street in the slightest, trust me. In fact, along with stories about its "ruthless" and "uncompromising" work culture, reports of such hardball tactics in Zynga's executive offices should only whet the appetite of your typical Wall Street 1%er.

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