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DealBook: Zynga Files for $1 Billion I.P.O.

July 1, 2011 by NewsMaker Leave a Comment

David Paul Morris/Bloomberg NewsZynga’s office in San Francisco.

With real-world profit and an inexhaustible supply of virtual cows, Zynga is gunning for a blockbuster debut on the public markets.

The online gaming company filed to go public on Friday, teeing up one of the most highly anticipated technology offerings this year. The start-up, founded four years ago by its 45-year-old chief executive, Mark Pincus, said it expected to raise about $1 billion in the offering, based on a figure used to calculate the registration fee.

But Zynga’s ambitions for its eventual I.P.O. may be substantially higher.

According to people briefed on the matter, Zynga is expected to ultimately offer up to 10 percent of its shares at a valuation near or above $20 billion. The company has selected Morgan Stanley to lead the offering; Goldman Sachs, JPMorgan Chase, Bank of America Merrill Lynch, Allen Company and Barclays Capital are also participating.

A spokeswoman for Zynga declined to comment.

The filing offers the first official glimpse inside the business model of Zynga, the company behind FarmVille and CityVille and some of the most popular games on Facebook. Unlike some of its Internet peers that have struggled to claw their way into the black, Zynga swung to a profit last year, recording profit of $90.6 million. Revenue roughly quadrupled last year, to $597.5 million. On an adjusted net income basis, the company recorded profit of $392.7 million in 2010 and has been in the black every year for the least three years.

The numbers reveal how the company’s stable of cartoonish games, has become one of the Web’s most powerful cash machines. As of the end of March, Zynga had $995.6 million in cash on hand.

Zynga’s filing comes amid a growing sense of urgency among some of the largest Web companies to go public.

For several years the I.P.O. market was effectively off limits, chilled by the financial crisis and the anemic recovery in the jobs market.

Although the global economy is still wobbly, troubled by Europe’s persistent debt crisis, a bevy of consumer Internet start-ups have flourished amid exuberant investor demand. A great deal of that enthusiasm is focused on an elite group of social Web companies — Zynga, Facebook, Groupon and LinkedIn – all of which have seen their valuations soar sharply in the last six months. Zynga, for example, raised a round in February at an approximate $10 billion valuation. The social shopping site Groupon, which was valued at $1.4 billion, just last year, is now contemplating an offering near $30 billion, according to two people close to the company.

LinkedIn, which went public in May, crushed expectations on its first trading day, its value more than doubling out of the gates. After pulling back in the days that followed, to about $60 per share, LinkedIn has rebounded to more than $92 a share – still roughly double its offer price.

Now, it’s Zynga’s turn to test investor’s appetite.

Jim Wilson/The New York TimesMark Pincus

At a $20 billion valuation, Zynga is technically cheaper than LinkedIn. At that price, Zynga is trading at 220 times last year’s profit, or 33 times revenue. LinkedIn – with a $8.8 billion market capitalization– is trading at roughly 570 times 2010’s profit and more than 36 times revenue. There are certainly a broad swath of competitors in the online gaming space, including stalwarts like Electronic Arts, but, so far, no has been able to shake Zynga’s dominance on Facebook, the world’s largest social network.

The company has 279.5 million monthly active users on the platform, according to the latest data from AppData, which tracks game developers on Facebook. Of the site’s top five games, four of them are Zynga’s, including the leader, CityVille. That game, which Zynga released just late last year, has more than 87 million monthly active users.

While Zynga has prospered on Facebook’s platform, its dependence on the social network represents one of the greatest threats to the game maker. In the risk factors section of its filing, its relationship with Facebook is listed as the first risk.

“If we are unable to maintain a good relationship with Facebook, our business will suffer,” according to the filing. “Facebook is the primary distribution, marketing, promotion and payment platform for our games.”

At times, the relationship has been strained over disputes concerning Facebook Credits, its virtual currency system, and changes to the site’s notification system. Tensions flared last year over Facebook Credits, which effectively takes a 30 percent “tax” from virtual good purchases, but the pair hammered out a five-year agreement in May to keep Zynga on the platform. Notably, the company’s revenue figures are net of Facebook’s cut.

“I think that’s the major risk in the story,” said Lou Kerner, a Wedbush Securities analyst. “They do exist at the whim of Facebook, but it’s certainly in Facebook’s own self-interest to have a vibrant gaming ecosystem.”

According to the filing, proceeds of the offering will be used “for general corporate purposes, including working capital, game development, marketing activities and capital expenditures.” In an investor letter, Mr. Pincus said he plans to continue to make big investments “in servers, data centers and other infrastructure.” And in a sign that Zynga will continue to be very active in the deals space — the company has made over a dozen acquisitions to date — Mr. Pincus said he plans “to fund the best teams around the world to build the most accessible, social and fun games.”

When Zynga finally goes public, Mr. Pincus, who founded the company in 2007, and its venture capital investors will see their fortunes multiply many times over. The group — which includes Yuri Milner’s DST Global, Kleiner Perkins Caulfield Byers, Silver Lake Partners and Andreessen Horowitz — has sunk hundreds of millions of dollars into Zynga.

Article source: http://feeds.nytimes.com/click.phdo?i=08e49e48777a21e4465d2ba57942ee5e

Filed Under: Business News Tagged With: merrill lynch, morgan stanley, public markets

DealBook: BJ’s Wholesale Agrees to $2.8 Billion Buyout

June 29, 2011 by NewsMaker Leave a Comment

Steven Senne/Associated PressA BJ’s Wholesale store in Dedham, Mass.

BJ’s Wholesale Club said on Wednesday that it would sell itself to the private equity firms Leonard Green Partners and CVC Capital Partners for $2.8 billion in cash, wrapping up a months-long sale process.

Under the terms of the deal, the buyout firms will pay $51.25 a share for the warehouse retailer, a 6.6 percent premium to BJ’s closing price of $48.08 on Tuesday.

It is also 38 percent higher than BJ’s stock price on June 30 last year, the day before Leonard Green announced that it owned a 9.5 percent stake in the company.

“BJ’s will benefit from the continued execution of our business plan and the significant retail expertise of our new partners at LGP and CVC, as well as from continued investments in our clubs, our people and technology, and the future of our business,” Laura Sen, BJ’s chief executive, said in a statement.

The deal announced Wednesday is the latest private equity transaction in retail. Leonard Green has been among the most active buyers in the sector over the last year, and its takeovers have included Jo-Ann Stores and, with TPG Capital, J. Crew. CVC also owns a number of retailers, including C1000 of the Netherlands and Cortefiel of Spain.

Leonard Green put BJ’s in play last year when it made a quiet takeover proposal for the company, prompting the retailer to hire Morgan Stanley to run an auction process. BJ’s acknowledged in February that it was up for sale. Last month, Leonard Green and CVC disclosed in a regulatory filing that they had made a bid for BJ’s.

The deal is expected to close in the fourth quarter, pending a vote by BJ’s shareholders.

In addition to Morgan Stanley, BJ’s was also advised by the law firm Wilmer Cutler Pickering Hale Dorr. Leonard Green and CVC were advised by Deutsche Bank, Citigroup, Barclays Capital and Jefferies Company. Those banks, along with GE Capital and Wells Fargo, also provided financing.

The buyout firms received legal counsel from Latham Watkins and Simpson Thacher Bartlett.

Article source: http://feeds.nytimes.com/click.phdo?i=57a4bc83afd17a276bff3d7e69366dee

Filed Under: Business News Tagged With: cvc capital partners, hale dorr, morgan stanley

DealBook: Wall Street Banks Lose Ruling on Research

June 20, 2011 by NewsMaker Leave a Comment

Jin Lee/Bloomberg News

A federal appeals court has ruled that a breaking news Web site was not misappropriating stock research when it published headlines about upgrades and downgrades, dealing a blow to Wall Street banks and a victory to the investing public.

A panel of judges on the United States Court of Appeals for the Second Circuit in Manhattan ruled that Barclays, Morgan Stanley and Bank of America could not control who broke news regarding its stock research.

The decision, issued on Monday, reverses a controversial lower court decision last year that required theflyonthewall.com Web site to wait until 10 a.m. to publish news about Wall Street research that was issued before the 9:30 a.m. opening bell. The ruling effectively gave the banks’ clients a half-hour edge in seeing market-moving research before everyone else.

“A firm’s ability to make news — by issuing a recommendation that is likely to affect the market price of a security — does not give rise to a right for it to control who breaks that news and how,” wrote Judge Robert D. Sack in the court’s 71-page opinion.

The banks had argued that publishing headlines about a bank’s upgrade or downgrade of a company was tantamount to stealing intellectual property.

U.S. Court of Appeals for the Second Circuit ruling in Banks v. The Fly on the Wall

Article source: http://feeds.nytimes.com/click.phdo?i=9690ebe170156835eed3c52078f67387

Filed Under: Business News Tagged With: court of appeals, fly on the wall, morgan stanley

DealBook: Leonard Green and CVC Bid for BJ’s Wholesale

June 17, 2011 by NewsMaker Leave a Comment

Leonard Green Partners and CVC Capital Partners have teamed up with to buy BJ’s Wholesale Club, which announced earlier this year that it was exploring a sale.

The two private equity firms said in a regulatory filing on Friday that they had submitted a joint proposal to buy the retailer. They did not disclose a specific bid price.

Leonard Green, which had previously expressed interest in acquiring BJ’s, is already the company’s largest shareholder, with roughly 9.3 percent of the stock.

Both Leonard Green and CVC are active players in the retail industry.

Leonard Green, based in Los Angeles, has investments in the Container Store, David’s Bridal, Neiman Marcus and Whole Foods. In December, the buyout shop agreed to buy Jo-Ann Stores for $1.6 billion. The deal followed a bid from TPG Capital for the clothier J. Crew.

CVC, located in London, has a more global perspective. Its holdings included C1000, the Netherlands supermarket chain; Matahari Department Stores in Indonesia; and Cortefiel, the clothing retailer in Spain.

Massachusetts-based BJ’s operates more than 190 warehouse in 15 states, mainly located on the East Coast. Amid speculation it was on the block, the company confirmed in February that it had decided “to explore and evaluate strategic alternatives.” Morgan Stanley was hired to help facilitate the sales process.

Article source: http://feeds.nytimes.com/click.phdo?i=17399a8151e1cb40267708f4b9cf80af

Filed Under: Business News Tagged With: cvc capital partners, department stores, morgan stanley

DealBook: Pandora I.P.O. Underwriters Got It Right (Sort Of)

June 17, 2011 by NewsMaker Leave a Comment

Richard Drew/Associated PressPandora executives at the New York Stock Exchange on Wednesday.

5:37 p.m. | Updated

With the post-I.P.O. Pandora halo fading, it is time to grade the underwriters of the initial public offering: Morgan Stanley, JPMorgan Chase and Citigroup.

In a nutshell, Pandora managed to sidestep the LinkedIn debate over I.P.O. underpricing.

As the offering approached, the underwriters raised the target price to a final sale price of $16, from a range of $7 to $9.The stock finished the day at $17.42 after hitting a high of $26. First-day returns were 8.9 percent. This is in the average range for I.P.O.’s and a particularly good result considering the recent broad decline in the stock market. (On Thursday, Pandora’s shares fell nearly 24 percent, to $13.26, well below the I.P.O. price.)

The muted first-day pop was possible only because the underwriters used a now-standard formula for hyping these tech I.P.O.’s. It goes like this: Offer a very small number of shares. then retail investors, hungry for Internet riches, will drive up the price by bidding on the small number of shares offered in the market.

Bigger, more experienced investors will then also buy these shares in the offering in order to resell them quickly to retail shareholders.

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In Pandora’s case, only about 14.7 million shares were sold. This is about 9.2 percent of Pandora’s outstanding shares. The company itself sold only six million shares, with the rest sold by current stockholders. This type of sale is usually frowned upon because investors prefer to see I.P.O. proceeds go to the company rather than selling stockholders. Shareholder sales are seen as a lack of commitment to the company’s prospects, although in this case, the sales were small compared with the amount being retained so the negative impact was limited.

In this light, the Pandora I.P.O. was really a success, in no small part because of an underwriter sleight of hand in capitalizing on excessive, perhaps ill-advised demand. And the valuation — $2.78 billion — is a product of that. The company has never recorded a profit and posted revenue of only $44 million last quarter.

As a DealBook reporter, Susanne Craig (@susannecraig), noted in a Twitter message, compare this with Sirius, which had revenue of $724 million last quarter and a market capitalization of about $9.26 billion.

At this point I could simply retype the story language from the tech bubble, comparing Internet media companies and their heady valuations with old-line companies and their much lower ones. Analysts were certainly quick to make the comparison with Pandora, noting that its valuation seemed out of line with its prospects and historical results.

Still, the chance to grab Internet riches is a real draw for shareholders. And, hey, you never know, the opportunity to be the next Google is always a possibility, however small. This could be true even if you are in the declining business like the music one.

In this light, the underwriters did a stellar job of building expectations for an I.P.O. that has uncertain prospects. The lack of a big first-day bounce is evidence.

But of course, they also sold a product in a manner that may have led it to be overpriced because of failures in the market. If you buy into the argument that underwriters should serve a gate-keeping function, the subject of my column on Tuesday, then this affects their final grade. As gatekeepers, underwriters have a responsibility to bring companies to market that are appropriate for an I.P.O.

You can argue whether I have a too optimistic and unrealistic view of the I.P.O. market. In addition, it is unclear what investors expectations are for underwriters here. Investors themselves may disagree with my view. And of course, caveat emptor.

But the Pandora I.P.O. again shows that the underwriting process is about how to sell shares in these types of companies rather than whether they should be sold.

So the underwriters deserve a solid A- for selling this risky I.P.O. so successfully. But for stoking demand in a manner intended to sell a chancy product, I am lowering their final grade to a gentleman’s C, subject to future revision. And yes, this shows how subjective grading can be.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://feeds.nytimes.com/click.phdo?i=f042d38cfe58cb71da23f568200721ef

Filed Under: Business News Tagged With: morgan stanley, nutshell, retail investors

DealBook: Pandora Shares Climb in Debut

June 15, 2011 by NewsMaker Leave a Comment

Justin Sullivan/Getty ImagesJoe Kennedy, Pandora Media’s chief executive

Shares of Pandora Media, the online music service, jumped at the market opening as investors embraced the latest Internet company to go public.

Shares of the initial public offering, priced at $16, opened at $20 and continued to rise modestly in morning trading on the New York Stock Exchange. At nearly $23 a share, the company is valued at about $3.7 billion.

Like many of its peers, Pandora repeatedly defied expectations in the run-up to its I.P.O. On Tuesday evening, Pandora priced its offering several dollars above its target price range of $10 to $12. The company sold 14.7 million shares, raising $234.9 million, at a valuation of $2.6 billion. Its underwriters, Morgan Stanley, JPMorgan Chase and Citigroup, also have the option to sell an additional 2.2 million shares.

Pandora — and the many Internet companies waiting to go public over the next 12 months — are riding a wave of optimism on the back of better-than-expected debuts for technology stocks. These young start-ups, many of which are not yet profitable, are capitalizing on the increasing demand for fast-growing consumer Internet companies — especially those with a social component.

The euphoria troubles some analysts who say it is reminiscent of the dot-com era, when investors piled into companies with flimsy business models at sky-high valuations. Although today’s crop of companies have real business models that are generating significant revenues, many are not yet profitable. Pandora, for example, is wildly popular with more than 90 million users, but it recorded a loss of $1.8 million last year. The service has never posted an annual profit.

The euphoria moved into high gear on May 19, when LinkedIn’s shares more than doubled on their first day of trading. A few days later, shares of Yandex, often described as the Google of Russia, climbed more than 55 percent on their debut.

Pandora’s first day is so far more modest, but still reflects the sector’s strength. In early June, the company had previously forecast a range of $7 to $9 per share.

Not all I.P.O.’s are prospering, however. The broader market for public offerings has been more mixed. The commodities giant Glencore, for instance, had a splashy debut in May with a $10 billion offering, but is currently trading below its offer price

“What’s interesting to me about Pandora is that it illustrates the broader trend of this year’s tech I.P.O. market,” said Ira Cohen, a managing director at Signal Hill. “The I.P.O. market is a place of the haves and have-nots.”

For Pandora, its popularity is something of a double-edged sword. It pays significant royalties to record labels to stream songs and as users spend more time on the service, the fees rack-up.

“As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,” the company warned in its latest securities filing.

According to analysts, Pandora will continue to struggle with profitability until it significantly increases the number of ads it serves and improves the way those ads are targeted.

Success in that area, however, may also alienate some of its users, who use Pandora because of its lack of ads.

And there are competitors. Several technology giants, including Google, Amazon and Apple have recently expanded their digital music services. Upstarts like Spotify, a streaming music service that is popular in Europe, also threaten Pandora’s market share.

In a filing, Pandora acknowledged the looming threat posed by its competitors, which could “devote greater resources than we have available, have a more accelerated time frame for deployment and leverage their existing user base and proprietary technologies to provide products and services that our listeners and advertisers may view as superior.”

“There’s a lot of competition, especially with Spotify expected to launch in the U.S. soon,” said Richard Greenfield, an analyst with BTIG Research. “I think there will be a lot of ways to get in the car.”

Article source: http://feeds.nytimes.com/click.phdo?i=0d49f7de3f1e87c784a25c17a74c6ceb

Filed Under: Business News Tagged With: morgan stanley, social component, target price range

DealBook: Pandora Raises Target for I.P.O.

June 11, 2011 by NewsMaker Leave a Comment

Thor Swift for The New York TimesTim Westergren, founder of Pandora.

With its initial public offering near, Pandora Media put up a bigger price tag on Friday.

The online music service increased its target price range to $10 to $12 a share, above its previous range of $7 to $9, according to its latest filing.

It also increased the size of its offering by a million shares to 14.7 million shares. At the top end of its range, Pandora is set to offer $176.2 million shares at a $1.9 billion valuation.

The company’s lead underwriters, Morgan Stanley, JPMorgan Chase and Citigroup, also have the option to buy up to 2.2 million additional shares.

Pandora, founded by the musician Tim Westergren, is an Internet radio service that allows users to create customized music streams.

Pandora’s latest jump comes amid increasing competition for shares in promising Internet start-ups. The professional social network LinkedIn, which went public last month, soared on its debut, more than doubling on its first day of trading. The company, which offered a small float of less than 10 percent, is now below the price at which it opened trading, but is still valued above $6 billion based on its market capitalization. LinkedIn’s splashy debut has encouraged many private companies, waiting to go public, to revise their estimates upward and in some cases change their timelines. Both Groupon and Zynga are working with bankers to submit a prospectus this summer, according to several people close to the companies who were not authorized to speak publicly.

The rising tide for Internet stocks is not lifting all I.P.O.’s, however. While several Internet companies, like LinkedIn and RenRen, raised their price targets on the road to their public offerings, several nontechnology companies have faltered. For instance, the luggage maker Samonsite raised $1.25 billion in its offering, a drop from earlier estimates. The world’s largest commodities trader Glencore went public in May with a highly anticipated $10 billion offering. Despite the fanfare, shares are now trading below its offer price.

According to recent data from Dealogic, American technology offerings are up 26 percent year-to-date. In contrast, the rest of the market is up about 12 percent.

Despite the enthusiasm for well-known Internet brands, several analysts have expressed caution that many of these companies are still struggling with profitability.

Pandora, for instance is not yet profitable, despite improving revenue. Last year, the company’s revenue more than doubled to $137.8 million, but it posted a loss of $1.8 million. The service is popular, with some 90 million users, but it has been bogged down by hefty royalty fees.

“As our number of listener hours increases, the royalties we pay for content acquisition also increase,” the company said in its filing. “We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses.”

Article source: http://feeds.nytimes.com/click.phdo?i=2e00fd48c77d9f842446923edc382e1c

Filed Under: Business News Tagged With: internet stocks, linkedin, morgan stanley

Bucks: More Employers Equalize Health Benefits for Gay Workers

May 21, 2011 by NewsMaker Leave a Comment

This week’s Your Money column looks at the growing number of companies that have decided to equalize the cost of health benefits for their gay employees.

Why is that even necessary? While many big companies offer health coverage for domestic partners, employees must pay taxes on the value of those benefits because the federal government doesn’t recognize their unions.

Over the last year, more companies have begun to shoulder these costs for their same-sex employees. Other companies, including Goldman Sachs and Morgan Stanley, are reviewing their current policy. I’ve also heard that Zynga is considering it.

We’ve been keeping tabs on who is doing what on this chart. We’d like to continue to heap praise on the companies that are adopting this generous policy, so please let us know of any others that do. You can e-mail me through my page on this Web site, or drop the names in the comment section below.

What other benefits would you like to see employers adopt for its gay, lesbian, bisexual and transgender employees?

Article source: http://feeds.nytimes.com/click.phdo?i=e4b74d0af728451c766e0464b67fc1b4

Filed Under: Your Money Tagged With: goldman sachs, money column, morgan stanley

DealBook: Arch Coal in $3.4 Billion Deal to Acquire I.C.G.

May 2, 2011 by NewsMaker Leave a Comment

Arch Coal said on Monday that it would buy the International Coal Group in a cash deal worth $3.4 billion that will create one of the world’s largest coal producers.

The combined company would have annual revenue of $4.3 billion on shipments of 179 million tons of coal — both thermal and steel-producing varieties — and employ about 7,400 people. It will also have reserves of 5.5 million tons, the second-biggest in the United States coal industry.

Steven F. Leer, chairman and chief executive of Arch, said the transaction would “extend our operating portfolio into every major U.S. coal-producing basin, and solidify our position as one of the industry’s lowest-cost producers.”

Earlier this year, Arch Coal lost out in the bidding for Massey Energy, the coal operator that had been troubled since an explosion last year at the Upper Big Branch mine in West Virigina. Alpha Natural Resources won Massey in a $7.1 billion cash and stock deal.

Arch is offering $14.60 for every International Coal share, 32 above I.C.G.’s closing stock price on Friday.

Both boards have approved the tender offer, which is set to commence in mid-May, and 17 percent of I.C.G. shares are already committed to the deal, which is expected to close in the second quarter.

Arch says it expects the deal will begin adding to its earnings per share by next year, with annual savings of up to $80 million.

Arch has obtained a bridge loan from Morgan Stanley and PNC, and plans to raise permanent financing by issuing debt and equity.

Arch was advised by Morgan Stanley and the law firm Simpson Thacher Bartlett, while International Coal was advised by UBS and the Jones Day law firm.

Article source: http://dealbook.nytimes.com/2011/05/02/arch-coal-to-acquire-icg-in-3-4-billion-deal/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: alpha natural resources, morgan stanley, tender offer

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