Why Did Zynga Tank After Facebook IPOed?
theatlantic.com
theatlantic.com
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.
Possible explanation: If you were a big institutional fund manager with a large portfolio, would you put your money in thousands of small-cap companies or a few large-cap companies? When an opportunity like FB arises and you want to get in, what would be the easier way to get the liquidity needed to buy FB? If you don't have very sophisticated trading and portfolio management technology, one of the easiest ways to get the liquidity is to sell the large-caps first, and GOOG could be one of them.
Another possible explanation: GOOG and FB are perceived to be enemies/antagonistic. So, when one stock has a positive event (IPO that provides lots of liquidity), the other stock is impacted. This is a psychological explanation. I can't prove it.
If people were holding ZNGA as a proxy for FB, with the intention to dump the shares for FB when it went public, then these people should have known that others would be doing the same. Thus, they should have started earlier. I think this theory explains the flash crash, but not the bigger picture.
>" 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."
A stock transaction is a two-way street. There is a buyer on the other end of the deal, you don't sell shares into a vacuum. So, selling the shares doesn't drive down price, lack of demand does.
As for making money on this, no dealers had shares available to sell short this morning or the past few days I believe.
This might be a part of the reason. But the big huge fall, then the huge rise might just be triggered by silly trading algorithms, maybe?
Like you said, Zynga and Facebook are presumed to be highly correlated in terms of value. But, Zynga needs facebook more than the other way round. I think (and this may just be utterly wrong), that the steep fall in facebook's value triggered an even steeper fall in Zynga's share price, which then cascaded to panicked investors selling their shares to lower it even more.
The real funny thing however, is the steep rise again. I am tempted to venture a guess that everyone was watching the trades to see who would make the first move, and then piggyback on them.
Sort of like a room full of people with guns pointed at each other. No one really wants to make the first move, but as soon as someone does, the only chance of surviving would be to start shooting.
This means that is was much more likely that it was down to bad trading algorithms. Or that is how I see it anyway...
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.
If Facebook shares had tripled today, that would also have been obvious after the fact.
If Facebook triples on Monday, you will kick yourself for passing up the once-in-a-lifetime opportunity to buy at the IPO price of $38.
And if the Facebook debacle continues and craters the entire market, we will see that all the warning signs were there, if only we could have recognized them in advance.
Is this one correct, though? I recall that insiders have selling restrictions for 180 days after the IPO date.
The lock-up doesn't necessarily apply to people who got in at the IPO, such as during the roadshow period. Also pretty sure the lock-up doesn't apply to people who bought private shares in secondary markets, such as the Goldman clients who bought in when Goldman offered private stock about 6 months ago.
As an employee, therefore, the IPO event itself is not too significant. Unless you have $1 options (or already own stock at a very favourable price), you can't bank on a return due to the uncertainty of the lockup period. Also, the end of the lockup period itself (although completely anticipated by the market) will likely be unfavourable for the stock price as selling employees introduce more supply.
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?
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?
"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...
um, they said that in the article.
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.