Disaster for King despite 10x cover

IFR 2026 29 March to 4 April 2014
5 min read
Anthony Hughes, Stephen Lacey

King Digital Entertainment, maker of the highly popular mobile game Candy Crush Saga, dealt a setback to the resurgent US tech IPO market by stumbling on its debut, in stark contrast to the windfall gains seen on many recent sector offerings.

Investors were left nursing big losses even though underwriters had told them ahead of the US$499.5m deal that the IPO was 10 times oversubscribed, with 60% of the shares placed in the hands of the top 20 accounts.

King’s failure to price the deal at the top end of the marketing range (it was priced at a US$22.50 midpoint) was a red flag ahead of Wednesday’s NYSE debut, as was the ready availability of stock for retail accounts. All of this year’s tech IPOs prior to King had been priced at the top end of the range or better.

King opened immediately lower at US$20.50 and traded as low as US$18.90 in its first session before finishing at US$19 for a 15.6% day-one deficit. The stock hit a fresh low of US$18.25 during Thursday’s session.

Investors were quick to direct blame towards the underwriting syndicate, led by JP Morgan, though the deal also came in a week in which many high-flying tech and high-beta stocks were sold off heavily.

This was just the latest tech IPO misfire for JP Morgan, which also led the disappointing 2013 tech IPOs of Chegg and Violin Memory. Still, the deal came with a high degree of difficulty, given King’s explosive growth.

King enjoyed a bumper 2013 in terms of revenues and profits from its Candy Crush franchise, but that also prompted doubts about the sustainability of the company’s success.

Investors had also been well warned about the risks of King’s hit-based business model. Having also witnessed or suffered steep losses on the much-derided 2011 IPO of mobile gaming rival Zynga, many of the most influential IPO investors were reluctant to take a disclosable position in King.

The syndicate, which was also led by Credit Suisse and Bank of America Merrill Lynch, went to some lengths to ensure good aftermarket performance, selling only 7% of the outstanding – one of the tightest free-floats, even among recent tech IPOs.

“The underwriters were telling people it was nine or ten times oversubscribed and there were multiple big orders in the book, but our channel checks did not show that demand was strong”

Underwriters had indicated days before the offering that the deal was oversubscribed and that they were comfortable with demand levels, but some on the buyside had been sceptical about the quality of the book of demand ahead of pricing.

“They [the underwriters] were telling people it was nine or ten times oversubscribed and there were multiple big orders in the book, but our channel checks did not show that [demand was strong],” one buyside source said.

JP Morgan also employed the greenshoe on the first day to support the price as the stock sagged, but that buying power was quickly overcome by market selling.

Candy crushed

Deal sources expressed shock at King’s performance, although they acknowledged that there had been some consternation during the IPO process as to how the company should deal with inevitable criticism about its reliance on Candy Crush, which comprised around 80% of revenues last year.

Candy Crush has nearly 100m daily users. The company’s next best game, Farm Heroes Saga, has just been released on mobile platforms and has 20m daily players, and King cited this as evidence that it had broadened its portfolio of games.

King was advised not to provide a detailed breakdown of revenues from its games in its registration statement, though the company’s reliance on Candy Crush was a clearly stated risk factor in the prospectus.

One ECM banker not on the transaction described the IPO price as “artificial” and said the IPO process lacked “serious price discovery”.

“Don’t get me wrong. These things are tough … but when conditions change between pricing and allocation, you have to adapt,” the ECM banker said.

Bankers remain bullish about tech IPO volumes this year, with several significant deals in the pipeline and investors still keen to exploit the alpha generation potential of these deals. A handful of companies – mostly software – are on the road this week, while cloud storage company Box Inc filed publicly for a US$250m IPO last week.

Still, the recent outperformance of US tech IPOs, many of which initially doubled from their debut prices, has dissipated with the recent sell-off. As of Thursday’s close, this year’s 10 US tech IPOs were up an average of 22% versus their IPO prices, but three deals – Care.com, A10 Networks and King – were trading below their issue prices.

Candy Crush at NYSE