Zynga plans $400-million secondary stock offering

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Zynga, the maker of online games FarmVille and Words With Friends, on Wednesday said it will seek to raise $400 million in a secondary public stock offering and rejigger when employees can sell their shares, moves designed to help prevent a sudden drop in the price of the company’s stock.

The San Francisco-based social games company took in $1 billion in its initial public offering in December, with an eye toward to financing an ambitious strategy to expand its products to mobile devices and internationally.

This time, however, the offering is meant to serve an entirely different purpose -- to shore up Zynga’s shares and stabilize the price.

Here’s why: Zynga employees who have stock options and awards have been barred from selling or trading their shares until May 28. At that point, they are free to cash in. And that’s exactly what the company is afraid of. Zynga officials fear that the stock price would plummet from the shock of so many employees selling their shares at the same time, according to a note to investors from Michael Pachter, an analyst with Wedbush Securities.

The solution is to let employees start to sell their shares over a staggered period of time, so that not all of the employee stock hits at once. Zynga, in its filing with the Securities Exchange Commission, said employees can choose to sell a portion of their shares now, another portion on July 6, and the remainder on Aug. 16.

A second solution involves the $400-million stock offering. By issuing more shares and widening the pool of available stock, a sell-off of employee shares would have a smaller effect because it would account for a smaller portion of the overall number of shares, the company explained in a news release.

The move raises several questions about Zynga. First, should investors buy into the new round? Zynga’s stock, which debuted at $10 a share, closed at $13.38 on Tuesday but lost ground in Wednesday morning trading following the company’s announcement. It was down 11 cents to $13.27 as of 10:45 a.m. PDT.

Second, what will those employees do once they’re able to cash in their Zynga chips? Will they stay with the company or move on to harvest their crops in greener pastures?

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-- Alex Pham