Zynga Inc (NASDAQ: ZNGA ) may have successfully reelected each of its seven proposed board members at its annual shareholder meeting last Wednesday. But that doesn't mean everybody wanted to stick around.
To be sure, two of Zynga's nine board members stepped down last week, including DreamWorks CEO Jeffrey Katzenberg, and early Zynga investor and LinkedIn co-founder Reid Hoffman. As a result, a Zynga SEC filing dated last Friday reveals it's no longer compliant with a NASDAQ listing rule requiring any company's board be comprised of a majority of independent directors.
But don't for a second think Zynga will be delisted from the popular exchange -- at least, not anytime soon. Zynga was given 45 days, or until July 27 2014, to submit a plan to NASDAQ outlining how it intends to regain compliance. Then, assuming NASDAQ accepts that plan, it can grant Zynga an extension of 180 days from the date of its original notification of non-compliance -- or until December 9, 2014 -- to implement it.
What's more, keep in mind the departures of Katzenberg and Hoffman weren't a big surprise to Zynga. In fact, Zynga not only disclosed in its April 29 proxy statement that both men had decided not to stand for reelection this year, but also stated it was already working to identify their replacements.
In short, Zynga knew this day would come, and it's highly unlikely they won't be able to find suitable board members to regain compliance with the NASDAQ in time to avoid delisting.
But does that mean you should buy the stock? Not necessarily.
Sure, Zynga CEO Don Mattrick has worked hard to right the struggling gaming specialist's wrongs since he took the helm last July. And Mattrick's efforts culminated with the complete turnover of all senior management following the departure of three more high-level executives less than two weeks ago.
At the same time, however, the market drove shares down earlier this month given Mattrick's uncharacteristically downbeat tone at the Bank of America Merrill Lynch 2014 Global Technology Conference, as well a general lack of visibility into Zynga's product pipeline for the second half of this year. The former is particularly surprising considering Zynga's board also just approved Mattrick's incredible $57.8 million pay package for this year, making him the second-highest paid CEO in the Bay Area behind only Larry Ellison. No matter how monumental the task at hand, that was an offer I noted last year he simply couldn't refuse.
Moreover, delisting or not, this is just the latest in a long string of shareholder-unfriendly actions from Zynga. This also isn't the only reason I prefer to avoid investing in companies primarily relying on continuously pumping out and monetize games in the free-to-play segment. Other reasons for Zynga in particular include a history of bad economics, survivor guilt in the face of recent layoffs, and the threat of enormous competitors like Activision Blizzard (NASDAQ: ATVI ) moving into the space to supplement their already enormous revenue and earnings streams.
A better way to play
In the end, that's why I still think investors who want exposure to the gaming sector would do better to avoid Zynga. Instead, stick with proven gaming industry stalwarts like Activision Blizzard. After all, Activision Blizzard is not only riding a wave of momentum after its blockbuster first-quarter results, but pays investors a nice $0.20 per share quarterly dividend while you watch it dominate the market.
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