Zynga to Stoke the Tech Bubble with a Low-Float IPO

Last Updated Jun 13, 2011 7:16 AM EDT

Oh, boy, here comes another loop in the new tech bubble rollercoaster: Zynga is reportedly planning to follow the IPO strategy of LinkedIn (LNKD) and offer just a sliver of its available stock to the public, according to a Bloomberg report. According to some nameless person on the inside, it will sell less than 10 percent of the shares, compared to the average 24 percent in tech IPOs over the last year.

The plans aren't final, things may change, blah, blah, blah. Yeah, right. If that smell of cabbage is in the air, bet there's a big pot boiling on the stove. We've just made a U-turn from financial reform and prudent management to puffery and priming the IPO pump to catch the retail investor suckers. If Zynga goes ahead with this strategy -- and, let's be real, there's little reason it wouldn't if the bankers push hard enough -- we will see the tech bubble pick up steam and barrel ahead.

The stock market candy man
Offering small slivers of stock to the market in an IPO is a way for the investment banks to create an artificial demand for shares and drive up the price. Just ask Jim Cramer:

It's a game and a nasty one, because it almost ensures that the people who jump in for shares after the stock is available, and that can include the mutual funds, which is another name for regular folks, are going to buy at too high a price, subsidizing the take of the banks. The stock will then begin to drop.

I don't see no stinkin' bubble
People like Marc Andreessen want to pretend that there is no bubble. His rationale? It's only a bubble when no one thinks it is, because only then do prices become outrageous. He's making the fatal mistake of assuming that reason trumps the emotional response of a crowd.

But then, he also argues that LinkedIn wasn't overvalued when the price jumped by 90 percent, even though the P/E ratio was over 500 (given that the P/E at $45 was 265). Of course he doesn't think it was. He was an angel investor. What, did you think he'd say, "Yup, I'm making way too much money on this?"

Or there's PayPal (EBAY) co-founder Peter Thiel, who claims that a bubble is "something a lot of people believe and can act on." Because most of these stocks are still private, there aren't enough consumers out there and, therefore, no bubble.

Just because the investing public at large isn't tearing into one stock after another doesn't mean there is no bubble. What a laughable notion. The bubble starts long before the public gets whipped into a frenzy. It starts when the VCs and the investment banks try to manipulate IPOs and drive up share price far beyond reasonable value so they can cash out on what the hoi polloi spend.

There's most definitely a bubble. More shenanigans like what the investment bankers did with LinkedIn and what they now seem to be planning for Zynga will only make it worse. By the time it will be incontestable, the bubble will be massive and it will be too late.


Image: morgueFile user pschubert, site standard license.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.