Facebook's rocky start to its initial public offering on Friday revealed one key fact: Zynga and the social-networking behemoth are two symbiotic companies connected at the revenue hip.
And sometimes that symbiotic relationship can completely backfire.
As Facebook shares priced at $38, moved toward $42 and then retreated back to the offering price, Zynga shares collapsed. In fact, Zynga shares hit stock exchange circuit breakers and were halted. A circuit breaker is hit when a stock falls 10 percent, 20 percent, and 30 percent. A circuit breaker is essentially a trading time out.
What freaked Zynga shareholders out? For starters, Zynga served as a proxy for Facebook shares before its IPO. Once Facebook went public, investors could have the real thing. Zynga, which is tethered to Facebook, wasn't a portfolio necessity for investors looking to buy into social-media companies.
The other reality is that Zynga's revenue largely depends on Facebook. Sure, Zynga is diversifying with its own gaming site, but Facebook represents the bulk of its revenue. If Facebook wasn't going to shine in its public market debut, what would that mean for Zynga?
Here's how the two sides describe their symbiotic relationship. Facebook said it its prospectus:
In 2011 and the first quarter of 2012, we estimate that up to 19 percent and 15 percent of our revenue, respectively, was derived from payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.
Zynga said in its most recent regulatory filing:
Facebook is the primary distribution, marketing, promotion, and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future.
Given that reality, it's understandable that Zynga shares would mirror Facebook's gyrations.
The larger question here is how long this symbiotic relationship can continue. At some point, Facebook will want to control an operation that accounts for a nice chunk of revenue. For its part, Zynga could simply be owned by the company it depends on for its revenue.
If Zynga shares keep falling, Facebook could swoop in and acquire its gaming partner. Strategically, a Facebook-Zynga merger would make sense. Zynga's falling shares make a Facebook acquisition much more financially palatable.