Zynga Preps Offering That Would Put 'FarmVille' Game Maker at $20 Billion

Zynga Preps Offering That Would Put 'FarmVille' Game Maker at $20 Billion

By NICK WINGFIELD, ANUPREETA DAS and GINA CHON

With Internet valuations surging and bankers circling Silicon Valley, online-games maker Zynga Inc. is preparing to test investors' appetite for an initial public offering that values the young company as high as $20 billion.

That would be double the price tag the San Francisco start-up, which makes "FarmVille" and other simple games played on Facebook's website, fetched just a few months ago when it sold shares to venture capitalists.

But since then, several Web companies have raised money at eye-popping valuations. Others have filed for multi-billion dollar IPOs. Shares of LinkedIn Corp. gained 80% its first day of trading last month, and the professional social network now sports a market value of $8 billion. Groupon Inc., which has racked up losses, has filed for an initial public offering that could value the online coupon site at more than $20 billion.

Zynga expects to raise as much as $2 billion in its IPO and it could file its paperwork as early as Wednesday, said people familiar with the matter. It will seek a valuation between $15 billion and $20 billion, these people said.

That could value the game publisher, which had about $850 million in revenue last year, at roughly the same as the two biggest videogame publishers—Electronic Arts Inc. and Activision Blizzard Inc.—combined.

Zynga has selected Morgan Stanley to lead the offering, the people familiar said. Goldman Sachs Group Inc. is also a lead underwriter, and J.P. Morgan Chase & Co., Barclays Capital and Bank of America Merrill Lynch will play a role in the IPO, these people said.

Zynga is also talking to banks about a credit facility of at least $1 billion, which can perhaps be used for acquisitions or other methods of expanding the company's services, one of the people familiar with the matter said.

A Zynga spokeswoman declined to comment.

The rush of Web IPOs, coupled with a frothy start-up investment environment in Silicon Valley, has fomented fears that the Internet sector is reaching a frenzied level not seen since the late 1990s dot-com bubble.

Unlike LinkedIn and Groupon, however, Zynga is expected to generate a profit this year. Nitsan Hargil, an analyst at GreenCrest Capital Management LLC, a research firm that analyzes private companies, estimates Zynga will have revenue of nearly $1.5 billion this year and be profitable. Mr. Hargil, whose firm isn't involved in Zynga's fundraising efforts, said he is more intrigued by Zynga's potential for profits than other Web companies.

Founded four years ago by Internet entrepreneur Mark Pincus, Zynga offers its games free and generates revenue mostly through the sale of virtual goods—for example, a tractor that helps FarmVille players harvest crops. While the vast majority of players never spend a cent in its games, some players pay up so they can accelerate their progress in the game and enhance their status in the eyes of other players.

Still, Mr. Hargil says there are concerns about Zynga's dependence on Facebook. While the company has sought to diversify its business through mobile games, its greatest successes have been on the 600 million-member strong social network.

Zynga's games collectively have about 271 million active monthly players on Facebook, an audience nearly eight times the size that of the next biggest Facebook app developer, according to AppData.com, a firm that tracks activity on Facebook.

The relationship between Zynga and Facebook has been tense at times. Over a year ago, the two companies butted heads after Facebook pressured Zynga to adopt a payment system called Facebook Credits inside Zynga games. They finally reached an accord in May 2010, when Zynga agreed to a five-year deal to use Facebook Credits in its games.

So far, Zynga has turned its early success on Facebook into a formidable barrier to competition from other game developers. The company heavily promotes new games, like its recently released strategy game "Empires & Allies," to its huge audience of existing players, giving the company a marketing advantage its rivals lack.

"Empires & Allies" is now the second most popular app on Facebook, with about 42 million average monthly players. Zynga's "CityVille," with 88 million monthly players, is the first.

It's unclear how long Zynga can keep its edge as more established games companies become more serious about Facebook games. Electronic Arts, for one, recently announced plans to bring "The Sims," one of the most popular PC games of all time, to Facebook.

An IPO would likely lead to huge paydays for many Silicon Valley elite, most notably founder and CEO Mr. Pincus, who stands to become a billionaire, at least on paper. Other Zynga investors include Digital Sky Technologies, Kleiner Perkins Caufield & Byers, Union Square Ventures and other venture-capital firms, along with individuals like LinkedIn founder Reid Hoffman and Peter Thiel, an early investor in Facebook and other companies.

CNBC earlier reported about Zynga's possible IPO and its launch as early as this week.

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