Zynga CEO Mark Pincus said layoffs will save the company, but the market doesn’t believe him

PIncus has more to contend with than angry birds.
PIncus has more to contend with than angry birds.
Image: AP Photo/Paul Sakuma
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Mark Pinucs, CEO of online gaming firm Zynga, had a heart-to-heart with his employees after announcing layoffs of 18% of the company’s work force. He said Zynga had become bloated and sluggish. The job cuts and office closures are a way of putting Zynga on a diet.

Maybe employees bought his speech, but the market didn’t. Zynga’s shares dropped by roughly 6% today. (For some context, the Nasdaq dipped by just over 1%).

Over-hiring isn’t Zynga’s only problem. Yes, the company quickly expanded, going on hiring sprees before and after its 2011 IPO.

But another glaring issue is the fact that Farmville, Zynga’s ticket to success, is looking like a one hit wonder (though the company is banking on its latest foray into online gambling). In that case, the problem lies with Pincus and his overall vision for the company.

But Zynga has an unusual three-tier stock structure that gives Pincus 70 times more voting power than the average shareholder. Other Internet companies with recent IPOs have also given their CEOs and/or founders more voting power than regular investors. But most of them, like Facebook, Groupon and LinkedIn, have a dual class structure, which is more common and less dilutive to normal shareholders.

The multi-tier class structure can make managers immune to falling stock prices since shareholders have little power to get rid of poorly performing executives and board members. Shares of Zynga have dropped roughly 54% in the last year, with most of the dips coming after disappointing quarterly earnings reports.

That leaves Zynga’s board responsible for pressuring Pincus and his management team to turn the company around. Groupon’s board ousted its former CEO Andrew Mason in February after the company’s poor performance, but Mason also went willingly and took responsibility for the company’s fall. But Pincus isn’t known for being so humble. Chances are he’ll stick around.