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What Does An Activist Hedge Fund Want With Zynga?

Eminence Capital is known for buying stakes in companies with the intent of forcing a deal or change of control. But Zynga's stock ownership structure makes the success of such a play unlikely. So what is Eminence up to?

Posted on September 3, 2014, at 4:51 p.m. ET

Robert Galbraith / Reuters

Eminence Capital re-entered the activist investing world after a sever-year hiatus earlier this year and successfully forced a merger of Men's Wearhouse and JoS. A. Bank, netting the hedge fund at least $14 million.

The $6 billion fund followed that up by announcing last month that it bought a nearly 10% stake in struggling World Wrestling Entertainment. And now, according to regulatory filings, Eminence has increased its stake in gaming company Zynga to 5.1% from the 3% stake it slowly began building in the third quarter of last year. The question is why?

Eminence's moves with both the WWE and Zynga are curious because the two companies have dual class ownership structures that make an activist play difficult due to the voting power such a structure affords management.

At Zynga, for instance, control still largely rests with co-founder Mark Pincus, who wields 62% voting power despite the fact that his equity stake is less than 10%. (Pincus ranks as Zynga's second largest shareholder behind Kleiner Perkins, which has 9.5% stake due to share class restructuring as of June).

Zynga, known for once-hot hit games like Farmville and Cityville, has undergone a massive restructuring over the last 18 months, including the decision by Pincus to step down from day-to-day operations less than a year after a new CEO took control. The company's stock has been extremely volatile over the timeframe, going from a low of $2.50 per share to as high as $5.79 per share and back again to their current roughly $3 per share.

But maybe, instead of an activist play at Zynga, Eminence is looking to take advantage of the Twitch effect, a reference to Amazon's recent $970 million purchase of the site that streams video of people playing video games. Prior to Amazon's purchase few people outside of hardcore gamers and tech heads had ever heard of Twitch. Now Twitch is headline-worthy tech company.

Eminence could simply be playing the long game with Zynga, betting that its troubles combined with gaming industry consolidation could mean a big-name buyer may soon swoop in and send the stock skyrocketing into a big payday for the fund.

As for the WWE, no such deal potential is looming so its motives with that company are a little harder to decipher.

For its part, Eminence declined to comment for this story.