Some complex financial news this morning as we have just learned that Zynga will be pursuing a secondary stock offering in the hopes of raising $400 million. However, and here’s where things get tricky, only a specific class of stocks are going to be sold and the driving purpose behind the move is not to raise money for the company, but rather to force those already holding stock to hang onto it for a longer term.
Here’s the deal: Zynga is going to allow the sale of low-power, short term stock (known as Class A) to long-term investors. What the company is essentially trying to do is increase the “lockup” period so that shareholders can’t dump all their stock in a few months and thus drive the value of the entire company down. What can sometimes happen is investors jump on a hot company during its IPO, and then six months later sell a good deal of their stock. This makes the investors a ton of cash, but it wreaks havoc on the company’s valuation and future stock prices. This is what those in the financial world call “increasing public float.”
The takeaway from all this is yes, Zynga will be selling stock and no, unless you’re already a long-term investor, you can’t get any. It’s more a move to increase financial viability than anything, and a cautionary step to make sure the company doesn’t lose a significant amount of its value this summer. In other words, a shrewd move that lets short-term investors get their payday while not destroying the bottom line.