Candy Crush brings IPO market back to earth

Fri Mar 28, 2014 8:00pm EDT
 
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By Nicola Leske

NEW YORK (Reuters) - In the weeks leading up to the IPO of King Digital Entertainment, the company's bankers scrambled to persuade investors that the maker of popular online game "Candy Crush Saga" was more than a one-trick pony, according to a source familiar with the situation.

As the debut approached this week, the bankers' job only got harder. On Tuesday, Facebook Inc said it would pay $2 billion for Oculus VR, a two-year-old virtual reality startup that has yet to put a product on the market. Facebook CEO Mark Zuckerberg described the deal as the social media giant's desire to bet on "the platforms of tomorrow."

But for some investors, the deal brought back memories of the Internet boom and bust in 1998-2001, where profitability and other financial fundamentals of companies took the back seat to a raging fad about anything with a dotcom identity, according to the source.

Bankers underwriting King Digital's offering had to call in favors with investors who had received large allocations in previous successful IPOs, the source said. As a result, King Digital priced the offering at the mid-point of its range of $21 to $24. But its shares tanked in Wednesday's debut, falling 16 percent and fell further on Thursday and Friday. King Digital could not be reached immediately for comment.

Wall Street bankers are now looking at the disappointing opening as a sign that investors are getting more cautious about the IPO market, especially when it comes to technology and biotechnology stocks. Although bankers said companies waiting in the wings so far seemed to want to forge ahead with their IPO plans, the realization is likely to moderate expectations on the size of offerings and valuations.

"You realize that people are going to be a little bit more cautious. You realize that the valuation needs to be reflective of that cautiousness," said Sam Kendall, global head of equity capital markets at UBS AG.

That would mark a sharp turning point for the IPO market, in which investors have been fed a steady diet of new public offerings this year from companies yet to turn a profit. More than 50 IPOs have priced in 2014, and two-thirds of those are unprofitable, according to Renaissance Capital, an IPO investment advisor.

Still, companies that have gone public this year have seen their shares rise 33 percent on average from their offer prices, according to Dealogic.   Continued...

 
Mascots dressed as characters from the mobile video game "Candy Crush Saga" pose during the IPO of Mobile game maker King Digital Entertainment Plc on the floor of the New York Stock Exchange March 26, 2014. REUTERS/Brendan McDermid