Will a CEO Change Revive Zynga?

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In a surprising move, social and casual game developer Zynga Inc (ZNGA) recently hired Don Mattrick, ex-head of Microsoft’s (MSFT) Xbox division, as the chief executive officer (“CEO”). Don Mattrick will replace Zynga’s founder Mark Pincus (from Jul 8), who will continue as the chief product officer and president of the board.

Although the news brought some cheer among the beleaguered investors [its share price has jumped 49 cents (17.6%) since the announcement], we believe that the new CEO has a tough job on his hands.

To-date, Don Mattrick’s career include a 15-year association with gaming major Electronic Arts (EA), where he was credited with developing two major franchises namely FIFA and the Sims. His successful stint with Microsoft saw the release of Kinect motion technology.

However, the CEO role at Zynga is a completely different ballgame. The company is passing through a difficult time, as its bookings and subscriber growth continues to decline amid stiff competition from mobile game developers.

Most recently, Appdata reported that Zynga (149.9 million users) lost its #1 position in terms of monthly active users on Facebook (FB) to London-based social game developer King (150.2 million users).

King develops games that can be easily played on both desktops and mobile. However, mobile is a segment where Zynga has failed to do much in recent times. It is here that the new CEO will likely focus.

Reportedly, Don Mattrick will look after the day-to-day affairs of Zynga, while Mark Pincus will be responsible for developing games and overseeing important strategic decisions though a new executive committee (jointly headed with Mattrick).

However, this management setup is quite baffling in our view. Don Mattrick is particularly known as an avid gamer and his skills and vision would have been much more helpful in improving Zynga’s product pipeline. We believe that this dual-setup may actually slow down the game development process in the near term.

Currently, Mark Pincus holds a 7.5% stake in Zynga that gives him 61.0% of the voting rights, putting him in a very commanding position. However, his operational skills and management abilities have been under scrutiny post the quick exit of a number of top-level executives over the last 12 months.

On the other hand, Don Mattrick is known for speaking his own mind to superiors and also for his commanding management style. Since, it is not clear how much operating independence Mark Pincus will grant Don Mattrick, we believe that a confrontation is highly likely going forward. This will remain an overhang on the stock in the near term.

Currently, Zynga has a Zacks Rank #3 (Hold).

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