BY EVELYN M. RUSLI
Zynga, the company behind many of the Web’s most viral games, is in advanced discussions on an investment that would value the company at nearly $10 billion and could pave the way for an initial public offering next year.
The company is in talks with the mutual fundgiants T. Rowe Price and Fidelity Investments, among other investors, for a round of financing near $500 million, said two people close to the discussions, who spoke on the condition of anonymity because the talks are confidential. Zynga is also contemplating filing for an initial public offering as soon as the first quarter of 2012, two other people said.
The investment negotiations and the lofty valuation they imply could further drive investors’ intense interest in social media companies, highlighted by last month’s deal between Facebook and Goldman Sachs.
It would also add to the debate over whether the enthusiasm for these fast-growing Internet companies points to an overheated market. As part of its deal with Goldman, Facebook raised $1.5 billion in January, giving it a $50 billion valuation.
In the same month, the social buying site Groupon closed a $950 million round, with investors like T. Rowe Price and Fidelity Investments. Groupon is considering a public offering that could value the company at $15 billion or more, according to people close to the matter. LinkedIn, a professional social network, has also filed for an initial public offering.
Although the Zynga financing has not yet closed and may still fall apart, there has been significant investor interest, these people said.
A spokeswoman for Zynga declined to comment. The Wall Street Journal reported the talks with potential investors on Monday and the possible $500 million round was reported Thursday by All Things Digital.
Zynga has emerged as one of the fastest-growing companies on the Internet, propelled by the popularity of games like CityVille and FarmVille.
In CityVille, which began in December, users create and manage virtual cities, constructing buildings and collecting taxes.
The game, like most in Zynga’s stable, has flourished on Facebook, where it reigns as the site’s top-ranked game with 96 million active users a month, according to AppData. FarmVille is second, with 51 million players.
All together, Zynga’s games attract more than 275 million users every month on Facebook, making it the most popular gaming service on the platform and a major contributor to the social network’s revenue.
The bulk of Zynga’s revenue, estimated to be more than $500 million, is tied to the virtual goods it sells on Facebook, analysts say. But Zynga has taken several steps in the last two years to become more independent. The company has signed partnerships with other social networks, like Yahoo, and it has expanded its reach on mobile devices, with applications for the iPhone and iPad.
In what could be its boldest move to date, Zynga is also preparing to start a stand-alone gaming destination that will allow users to play its games outside of Facebook, according to three people briefed on the matter. The project, known as Zynga Live, will also serve as a gaming social network and is expected to make its debut in the middle of this year.
“We’re always looking for ways to improve the user experience, but we don’t ever comment on what we may or may not be working on,” Zynga said in a statement. “We’re focused on building a new form of entertainment that’s connecting the world through games.”
For Zynga, it is a critical step forward as the company considers filing for a public offering, which could come as early as the first quarter of 2012, according to the two people close to the matter.
Although people said the company was still reviewing its options, Zynga has laid the groundwork to be a public company. In July, Zynga hired David Wehner, an investment banker from Allen & Company, as its chief financial officer, a move many interpreted as a precursor to an initial public offering. And in 2009, Zynga and its accounting firm, Ernst & Young, began reviewing its books and looking at Sarbanes-Oxley compliance issues, said a former employee.
Zynga declined to comment on its income and revenue, or on a possible I.P.O.
Zynga is profitable, but analysts say the success of an offering would hinge on the company’s ability to prove to investors that it is not at the mercy of Facebook. The relationship has been strained at points over disputes concerning Facebook Credits, its virtual currency system, and changes to the site’s notification system. Tensions flared last year, but the pair worked out a deal in May and signed a five-year agreement to keep Zynga on the platform.
Experts say the creation of an independent destination site would only strengthen Zynga’s stability.
“If you look at some of their recent actions, it’s clear that they’re making way for an I.P.O.” said Atul Bagga, an analyst at ThinkEquity. “If and when they go public, they’ll have a better story to tell.”
Zynga, founded in 2007 by Mark Pincus, its chief executive, has aggressively expanded its staff and international footprint in the last 12 months, thanks to its sizable war chest. It has also raised more than $500 million from backers like DST Global, Google, Kleiner Perkins Caufield & Byers, and Andreessen Horowitz.
With that cash, the company has expanded its products abroad, especially in Asia. It has made nine acquisitions in the last nine months, buying gaming companies like XPD Media of Beijing and Unoh of Tokyo. As Zynga balloons, management is making way for a larger staff. According to two people close to the company, Zynga will double its staff this year, to 3,000.