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When credible reports about Zynga’s upcoming IPO filing started flying this July, expectations for the social gaming giant’s value were running $15 billion to $20 billion. Now, with Zynga detailing the offering ahead of trading set to start December 15th, the actual offering price could value the company from $5.9 billion to $6.99 billion, or $7.6 billion to $8.9 billion including employee stock options.

With options included, Zynga’s value will be $7.6 billion to $8.9 billion. That’s bigger than Electronic Arts’ $7.7 billion, but far short of just five months ago. One of the consequences is that some of the investors who invested in February are underwater. Those pre-IPO investors such as Fidelity Investments put money in at $14 per share.

What could have caused such a precipitous change in fortunes in just a matter of months? Here are a few possible explanations:

  • Financial Timing: Over the summer, a cautiously optimistic consensus was growing around the idea that the world economy was clawing its way towards recovery and would avoid a double-dip recession. Today, daily news of cascading troubles in Europe is stoking fears of another massive financial panic and a possible collapse of the Euro, leading to massive stock volatility and worries about a prolonged economic depression. Hardly the best environment to be making a massive new stock offering.
  • Sliding User and Profit Numbers: Zynga’s games currently show about 215 million monthly players between them on AppData, down from 232 million in July. Meanwhile, the company’s latest financial disclosures showed its profits are actually declining despite significantly increasing revenues, a trend some industry watchers attribute to increased costs for user acquisition and retention in today’s more competitive social gaming market. It’s these kinds of numbers that have led some, including Take Two CEO Strauss Zelnick, to doubt a Zynga business model that requires new players to constantly replace departing ones and allows 97 percent of users to play without paying a cent.
  • Departures: Nothing saps investor confidence like major players leaving a company before an IPO, and while the recent departure of Zynga chief business officer Own Van Natta may have been expected, it’s hard to spin it as a good sign for the company. While Van Natta, a former MySpace executive, will remain on Zynga’s board and continue to provide strategic advice, investors may be more likely to put their faith in a company that shows continuity at the top of the org chart during the crucial pre-IPO period.
  • Competition: There’s been one massive change in the social gaming environment since Zynga’s IPO plans were first announced, and it goes by the name The Sims Social. Launched August 9th, EA’s biggest push yet into the social gaming market is maintaining over 30 million active monthly players, according to AppData, rivaling Zynga stalwarts like FarmVille and possibly taking millions of players from Zynga games in general. While Zynga might still be the largest social game maker by a good margin, their position no longer seems quite as invincible as it did in the pre-Sims-Socialworld.
  • Bad Press:  While Zynga has been forced by the SEC to endure a “quiet period” before its first stock issuance, that hasn’t stopped the press from dripping negative stories on the company. The most damaging may have been a recent New York Times piece that cited multiple anonymous sources in and around the company in painting a picture of harsh working conditions and disaffected employees ready to cash out the first chance they get. That report also included word that Zynga failed in high profile acquisition bids for casual and mobile game leaders Popcap and Rovio, despite massive cash offers of up to ten figures. After being presented with this kind of image from the press, it’s not hard to see why the average investor might be less bullish on Zynga than initially expected.
  • It was never worth $20 billion in the first place: At a $20 billion market cap, Zynga would have been among the top 200 most valuable companies traded on Wall Street, at roughly the same lofty level as food giant Kellogg. That valuation would have come in around 46 times the company’s summer earnings, much higher than other game industry titans like Activision (6X multiple), Electronic Arts (11X multiple) and Take-Two (8X multiple). The lower valuation is more in line with the idea that Zynga is a worthy investment but not a historically strong, once-in-a-lifetime, market-busting one.

Correction 12/3/2011: We’ve updated the valuation estimates at the top of this story.

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