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Opinion: Zynga investors start to realize their predicament
Opinion: Zynga investors start to realize their predicament Exclusive
August 24, 2012 | By Chris Morris

August 24, 2012 | By Chris Morris
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    6 comments
More: Social/Online, Smartphone/Tablet, Business/Marketing, Exclusive



It's a pretty safe assumption that anyone who shelled out for Zynga stock when the company went public -- or even in the five months that followed -- isn't real happy these days.

After reaching a high of nearly $16 per share, the stock now dwells in the cellar, closing Thursday at $3.25. (And, if it weren't for JMP Securities' bullish words when it initiated coverage on the company Wednesday, it would almost certainly be even lower.)

Things took a turn for the worse for investors a few weeks ago, though, when CEO Mark Pincus said he would never consider the sale of the company. As word of that declaration has slowly spread, some investors have started to squawk.

Let's be clear up front. While I've pointed out Zynga's problems in the past, I'll be the first to say the idea of a company sale at this point doesn't make a lot of sense. While its stock is circling the drain and it's certainly suffering challenges with audience and executive retention right now, the company is cash rich and has plenty of room to recover.

And shareholders certainly have a right to be frustrated. Traditionally, after all, a company has a fiduciary duty to make decisions that are in the best interest of its owners -- the shareholders.

There's one little problem with that, though. The shareholders don't own the majority of Zynga. Mark Pincus does.

Absolute control

This has never been a secret. It was clear from the day the company filed its IPO paperwork with the SEC that Pincus was not giving up any form of control in the company. With his super shares, he has voting power to control every decision the company makes, even if every last shareholder thinks it's a bad idea.

So why, you have to ask, did anyone crazy enough to hand their money to Zynga, think there would be an exit strategy? If Pincus has shown anything throughout his tenure at the company, it's his insistence on absolute control. (No one knows that better than John Schappert, who was unfairly tagged as the reason for the company's decline.)

Zynga insists that the social games sector is shrinking, saying that a "challenging" environment on Facebook was the reason it wildly missed its second quarter earnings expectations and will fall short of its earlier guidance for the fiscal year.

Facebook, though, says it hasn't seen any sign of that. In fact, it notes, the number of people playing games was up 8 percent in the first half of 2012. In the last month, in fact, some 235 million played a game on the social network.

In other words, people are playing more; they're just not playing Zynga's games.

That, unfortunately, puts Zynga shareholders in the same position as many Zynga employees. If they want to see any return in their shares in the company, they have little choice but to sit tight and hope that things get better.

The key difference is this: Investors should have known better. Employees didn't have the chance to ignore the warning signs. Those weren't there when they signed on board -- or if they were, they weren't so glaringly obvious.


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Comments


Ralph Barbagallo
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Dual class stock structures are very common in Silicon Valley. Google has one, so does Facebook and many more. It's not some dastardly plot by Pincus.

Ron Dippold
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Zynga's always been very upfront that their strategy is to steal games and ruthlessly exploit the player. The gamble you took when investing or joining the company was that the players would never notice.

Apparently they did, and now you're trapped in a down elevator with a sociopath, but you knew who he was when you got in.

Michel Desjardins
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It's one thing to have a corporate strategy, but one still need to be able to put it into operations. I consider they miss the boat by overkilling the data analytics and the capitalist in-game monetisation to the detriment of having fun games.

I tried a few Zynga's games in the past. That's now why I am making my own game...

Justin Sawchuk
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Mark Pinkcus sounds like another tyrant and the fact he happens to be a you know what doenst help either.

A S
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As an individual investor who is not looking to cash out for 20-30 years (i.e. I'm not looking for an IPO flip), I would never ever buy stock without voting rights. Yeah this means I miss out of the odd Google, but people who quote that as a success always forget about the invisible graveyard of dictatorial companies who didn't make it, and took 100% of stockholder value with them when they went.

I don't know when it was stockholders decided to abrogate themselves of corporate governance responsibilities, but I don't think J P Morgan would've put up with s**t like this, so I don't see why we have to either.

Alan Youngblood
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On the brightside, more people are playing non-zynga games on facebook. That can only be good for the industry.

The signs were there for those who invested/worked there. Why did they flock there anyways?


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