March 29, 2012, 9:44 AM — Keep an eye on shares of Zynga (NASDAQ: ZNGA) today. The social gaming company priced a secondary offering Wednesday of 43 million shares at $12 each, sending the stock down 6% to 12.24.
It might seem logical that the $12 secondary price will be the floor once the new shares are available, but those 43 million shares will increase the company's "float" -- the total number of shares available for public trading -- by 35% to nearly 165 million shares.
One purpose of the secondary offering and increase in available public shares is to reduce future volatility of Zynga's stock. But shares haven't been particularly volatile since the company's mid-December IPO. In fact, after stumbling out of the gate, Zynga shares were up this year 38% this year through Tuesday. Shareholders could live with more of that kind of volatility.
The other purpose of a secondary offering is to raise more capital for the company. But that's not happening here: All of the new public shares are being sold by insiders, not Zynga itself.
Which begs the question: Why are insiders, who presumably are bullish on the social gaming company's long-term prospects, dumping shares so quickly? After all, the lockup period expires in a couple of months. Why not hunker down and wait? Are employees or Wall Street shareholders pushing for an earlier cash-out? If so, why?
Here's a thought to ponder from a guy called Tincup, who runs a great new blog called The Social Networking Bubble:
If the insiders felt like the company was going to be a long-term play why would they sell large amounts of shares just six months after the IPO? I understand selling a small percent to hedge future risk in the economy, but why would they flood the market with a huge percentage if they felt like the company had immense growth, profit, and cash flow potential well into the future? If the company might be worth $20 billion in the future, why sell a big chunk of shares just six months after the IPO when the company is only worth $9 billion? Something stinks here.
In my opinion, that last statement could be applied to just about anything that Wall Street insiders do. Remember, folks: If you're not cynical, you're not paying attention.