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A Play for Take-Two?

Microsoft has stirred the pot in video-game machines with its Xbox. The buzz is that its next move may be the games themselves. Analysts say video games are hot Christmas items this year--fodder for such platforms as Sony's PlayStation 2, Nintendo's GameCube, and Microsoft's Xbox. And obviously, the more games sold, the greater the demand for the hardware. That's why Microsoft has come up with its own offerings, such as Halo. But it has a ways to go to catch up with Electronic Arts, Activision, THQ, or Take-Two Interactive Software.

So Microsoft might bid for one of them. Some pros are betting on Take-Two (TTWO), which sells games for Sony (SNE), Nintendo (NTDOY), Apple Computer (AAPL), and Microsoft (MSFT) machines. A strategist at one investment bank says Take-Two is attractive not only for its products but also because it is the most undervalued: It trades at 14, or 12 times estimated 2002 earnings of $1.15 a share, vs. Electronic Arts' p-e ratio of 91, Activision's 30, and THQ's 28. "The video-game business is driven by hits," says Arvind Bhatia of SWS Securities, and Take-Two "has big hits." Its Grand Theft Auto III has been one of the top-sellers since its release on Oct. 22. Canvassing 40 outlets, including Best Buy (BBY) and Wal-Mart Stores (WMT), Bhatia notes retailers report the game "in very high demand." He rates the stock a buy. Thomas Andrews of GKM Research says Take-Two is a "compelling investment due to its solid line-up." Take-Two President Paul Eibeler, a consultant to Microsoft when it was developing Xbox, wouldn't say if Microsoft was eyeing Take-Two. But he says mergers will happen--now that Microsoft is a big player. Microsoft couldn't be reached for comment. By Gene G. Marcial

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