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Take-Two Ponders a Second Act

Shares of the controversial video-game developer—best known for Grand Theft Auto—rally on news that it's considering a sale of the company

Investors welcomed an announcement that Take-Two Interactive Software, the troubled publisher of the Grand Theft Auto video-game franchise, may put itself up for sale. The stock rallied $1.76, or 8.4%, after Take-Two (TTWO) announced it will delay its annual shareholder meeting by six days until Mar. 29 and that it's considering strategic options—including selling the company.

Shareholders reckon a different owner could better run the company, which has struggled to find a successful niche beyond Grand Theft Auto. Periods between new versions of the game tend to be lean, laying bare other pitfalls that include investigations into how the company handled stock options. Former Chief Executive Ryan Brant pleaded guilty to options-related charges and agreed to pay a $7.3 million fine. It doesn't help that Take-Two has had to restate earnings for periods going back as far as 1997 or that it ran afoul of the Entertainment Software Ratings Board and other authorities for embedding sex scenes in a version of its most popular game (see, 6/28/06, "Take-Two Takes More Lumps").

The Sum of Its Parts

Speculation about a sale has picked up steadily since Mar. 7. That's when a group of shareholders, including SAC Capital Partners, Oppenheimer Funds, and DE Shaw Valence Portfolios, which represent more than 40% of the outstanding equity, said it planned to launch a boardroom fight by electing their own directors and installing a new management team.

The prospect of a new management team—whether as a result of a shareholder revolt or an internal management shakeup—warrants a share price of $25, up from today's close of $22.61, says Mike Hicker at Janco Partners in Denver. What's more, it's possible that Electronic Arts (ERTS) might even step in as a buyer. "Stategically, EA would be a great buyer," Hicker says. "EA is the strongest player there is in sports games, and Take-Two has taken market share away from them there."

Other analysts are beginning to speculate on scenarios that carve Take-Two into small pieces, leaving intact only its most valuable core, the Rockstar Games unit, responsible for the Grand Theft Auto series. In one possibility, EA might acquire the 2K Sports division, which includes a series of games licensed from Major League Baseball, while other divisions would be sold off. EA, traditionally wary of games aimed at a mature audience (despite having released an M-rated game based on The Godfather film series), would be less inclined to court the kind of controversy involved with owning the violent Grand Theft Auto franchise.

Not a "Magic Bullet"

Michael Pachter at Wedbush Morgan Securities in Los Angeles says the speculation is misguided and that the rally may soon fizzle. "What you have here is a set of dissident shareholders saying they can shoot a magic bullet, by shaking up the board and management team, followed by the company saying in response to that they would consider selling," he says. The ensuing stock surge is "not logical. This company is worth $12 a share. The market is getting this one wrong."

Pachter placed that target on the shares on Mar. 1, when he issued a blistering research note on Take-Two, reminding readers that while Take-Two generates significant profit from Grand Theft Auto, the next iteration of which is due in October, nothing else it does is profitable. Shareholders face a dilemma: Stay the course and hope for a more profitable outcome in 2008, or sell. Pachter's price target clearly indicates the choice he'd advise stockholders to make.

Hesseldahl is a reporter for

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