Zynga, makers of Farmville and other things that irritate you on Facebook, is set to launch its IPO. In its last round of funding the company claimed to be worth $10 billion or $1 billion more than LinkedIn's (LNKD) current market cap. Guaranteed that for the IPO the value Zynga alleges itself to be worth will be even higher. Talk about grading your own papers. Since dot com and dot bomb have so recently been used, what are we going to call this bubble?
Now let's be clear: It won't be Zynga who sets the IPO valuation. The company has too great a vested interest to be credible on that. So instead the value is set by the IPO's underwriters.
Underwriters are usually paid seven percent of the total amount a company expects to raise. No conflict of interest there whatsoever. There sure would seem to be a need for a competent, independent rating agency for these things. Did someone suggest Moody's or Standard & Poor's? Let's wait a minute for the laughter to die down. The word "competent" was used, after all.
Zynga may have real earnings... so it must be worth $12B!
To be fair to Zynga, it is almost certainly worth more than LinkedIn. The game company reportedly generated about $400 million in profit last year on about $850 million in revenue. LinkedIn only had a revenue of $292 million and net income of $15.6 million in its last four quarters. As MoneyWatch's Conrad de Aenlle points out, that means the social network company is trading at 30 times revenues and 564 times earnings.
Using those multiples Zynga is worth $12 billion. See, it all makes sense. I'll lie, you swear to it and the market will back us both up.
Need further proof we're in cloud cuckoo land? The company behind the Russian search engine Yandex raised $1.3B in its IPO yesterday. In a RUSSIAN COMPANY? Has anyone noticed how business operates there? I'd sooner give my money to a three-card Monte dealer.
In This Time Is Different: Eight Centuries of Financial Folly -- the definitive book on bubbles -- Carmen M. Reinhart and Kenneth Rogoff put it this way: "Each time, society convinces itself that the current boom--is built on sound fundamentals. ... Our working definition of this-time-is-different syndrome" is that 'the old rules no longer apply.'"
Sometimes even telling people the truth doesn't work. Or, as they say in Texas, "You keep giving them books and giving them books and they keep chewing on the covers."