Zynga Inc (NASDAQ:ZNGA) founder Mark Pincus said he was stepping down as chief executive of the troubled video game company and will be replaced by Don Mattrick, currently the head of Microsoft Corporation (NASDAQ:MSFT)’s Xbox division.

Zynga Don Mattrick

Pincus will remain Zynga’s chairman and chief product officer. He and Mattrick will report jointly to the board and will form a new executive committee to help manage the company’s operations.

“Zynga is a great business that has yet to realize its full potential. I’m really proud to partner with a product focused founder like Mark and work with the executive team to grow the DNA of the company and lead this transition,” Mattrick wrote in an email to Zynga Inc (NASDAQ:ZNGA) staff that was posted on the company’s website.

The changes underscore how difficult it has been for Pincus to revive his company, which went public in November 2011 amid lofty expectations, but has been caught flat-footed by the rapid adoption of mobile devices and an exodus of high profile employees.

Bank of America Merrill Lynch believes the Street will likely welcome a change in vision and leadership, and stock was up 14 percent on the news, as Pincus was the last high-profile executive remaining from the IPO.  However, the company will be run by an executive committee that includes Mr. Pincus and Mr. Mattrick, which is unconventional and may face execution bumps in the road.

Goals for the New CEO

Mr. Mattrick has extensive industry experience in game development and online communities with EA and Microsoft, which are key positives.  However, what really drives social and mobile game companies, in BAML’s view, are hit titles.  To find new hits, Mr. Mattrick may be able to help recruit talented developers to Zynga Inc (NASDAQ:ZNGA) or make the right studio acquisitions.

Goals for the new CEO will likely include:

1) guide the company through a re-organization and improve retention,

2) improve title execution for games in development (timing, quality, and monetization),

3) find (or acquire) new titles that put the company on a path for growth,

4) build the company’s real-money gaming business, and

5) position Zynga.com as a vibrant platform for third party developers.

BAML forecasts an uphill battle, but Mr. Mattrick is well qualified for the role.

Street Will Watch Zynga’s Use of Cash

There were rumors in the press of Mr. Mattrick possibly returning to Electronic Arts Inc. (NASDAQ:EA), which makes sense as Electronic Arts is also searching for a CEO.  BAML does not have visibility on whether EA was interested in Mr. Mattrick, but given Mr. Riccitiello’s unsuccessful return to Electronic Arts, that may not have been an option.

BAML thinks Zynga Inc (NASDAQ:ZNGA), with over $1bn in cash and an evolving position in social and mobile platforms, may have offered Mr. Mattrick a more entrepreneurial environment with more upside potential.  the Street will be closely watching the company’s use of cash in Mr. Mattrick’s first year, as the cash provides downside support for the stock.

BAML Maintains Neutral

This is positive news for Zynga Inc (NASDAQ:ZNGA) as there was uncertainty if Mr. Pincus (with about 60% voting control) would relinquish his CEO role. Since replacing their CEO, Groupon Inc (NASDAQ:GRPN) (+90% vs. 7%), ACTVActive Network Inc (NYSE:ACTV) (+46% vs. 2%), Yahoo! Inc. (NASDAQ:YHOO) (+61% vs. +19%), and EA (+24% vs. 4%) have outperformed the S&P 500 (INDEXSP:.INX) by an average of 48 points.  However, BAML remains Neutral on the stock as the news does not change the near-term view on social/web gaming business model or Zynga’s ability to find new hits.  Also Mr. Pincus still has majority voting power and they do not see any change is Zynga’s acquisition potential. Finally, Poker and Mobile are the largest components to the BAML valuation and weak 2Q data for Zynga’s titles (esp. Poker) is a concern.  BAML sum-of-parts PO remains at $3.60.