Posted by Zynga’s IPO hit the market on December 16th, 2011, and the stock price sank from the $10 IPO price to $9.50 at the closing bell.
Was the stock a “flop,” as so many commentators stated?
In my opinion, not at all! Zynga was the real winner in this.
Zynga raised $1 Billion by selling 100 million shares at $10 each. At the end of its first day as a publicly traded company, the market determined the shares were really worth $9.50 each.
Zynga sold shares worth $950 M for $1 B, profiting a cool $50 M in one day. Zynga was the real winner and all the IPO investors were losers.
But that’s not what the market commentators would have you believe
The news after the IPO all said that Zynga “flopped.” They stated that the fact that the stock did not go up on the first day was a bad sign for Zynga.
This was a phenomenon that is also taught at business school. At Wharton, it was drilled into us that stocks should go up when they IPO. This was especially important in the tech bubble, which occurred when I was a student there.
I never subscribed to that ideology. It seemed like a bad deal for the company. Back in the tech bubble, some IPOs would climb over 50% in one day. What a huge opportunity cost to the company. They could have sold their shares for 50% more on the open market but chose not to. Where is the wisdom in that?
Commentators would have you believe that a stock that spikes on the first day creates “momentum” and “mojo.” Hogwash. Do you remember how much Wal-Mart went up or down on it’s first day of trading? What about Microsoft or McDonalds? No one remembers because it is completely irrelevant – no more important than how much the stock went up or down on any other day during the year.
It’s time to stop gauging a stock by it’s IPO performance
Any analyst would tell you, measuring any stock by it’s performance on one day would be ludicrous. So why do we put so much emphasis on IPO price? It’s time to stop.
The only thing we should gauge by the IPO performance is the capabilities of the management. If the price ends up at or below the IPO price on day 1 of trading, it was a success. And for Zynga, I give Mark Pincus, the CEO, two thumbs up. He successfully sold a $9.50 stock for $10, profiting $50 M in the process. He got exactly what he wanted, and the investors were the suckers, not him.