

Why Did Zynga Tank After Facebook IPOed? - mattobrien
http://www.theatlantic.com/business/archive/2012/05/why-did-zynga-drop-after-facebooks-ipo/257395/

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hristov
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.

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samwilliams
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...

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ArchD
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.

~~~
samwilliams
Good point. But if you were a ZNGA owner who wanted to buy FB at a lower price
than the expected one, you would know that as soon as the FB price was lower
than expected, the ZNGA stock would slide (as everyone was using it as a
proxy). Subsequently, unless you sold within 2 minutes of the FB price being
known, it wouldn't be a good strategy (as you would end up loosing money on
the ZNGA sell).

That said, as long as you acted fast enough, that strategy was win-win. Either
FB stock was too high and ZNGA rose too, or FB was affordable and you could
quickly change to that, before ZNGA fell.

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panarky
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
> 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?

~~~
panarky
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...](http://www.latimes.com/business/technology/la-fi-tn-facebook-
trading-20120518,0,6622700.story)

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dbkbali
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.

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tatsuke95
This isn't a "possibility", it's the duty of the underwriter.

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dbkbali
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.

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coryl
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.

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dmvaldman
Can you explain why?

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luser001
I'll try: they're sharecroppers (e.g.,
[http://www.tbray.org/ongoing/When/200x/2003/07/12/WebsThePla...](http://www.tbray.org/ongoing/When/200x/2003/07/12/WebsThePlace))

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redthrowaway
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.

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ArchD
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.

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Dzidas
It looks like pair trading.

