It's all about the games. Electronic Arts' (ERTS) $2.1 billion gambit to acquire Take-Two Interactive Software (TTWO) is a bid to further expand its portfolio of lucrative games by taking control of the blockbuster Grand Theft Auto series as well as popular sports titles including games based on the exclusive Major League Baseball franchise.
But the rich asking price, which drove Take-Two's shares to record Nasdaq stock market gains on Feb. 25, may not be all that's required. EA is offering $26 a share for Take-Two, a 64% premium over the stock's Feb. 15 closing price—the last day it traded before the bid. Take-Two's management rejected the bid on Feb. 22, driving EA to take its pitch directly to investors Feb. 24.
The jockeying is only likely to intensify. Take-Two chairman Strauss Zelnick has said the company would only be ready to talk about acquisition after the Apr. 29 release of the upcoming Grand Theft Auto IV, developed by Take-Two subsidiary Rockstar Games and likely to be one of the biggest games of 2008. In a letter made public yesterday, EA Chief Executive Officer John Riccitiello fired back, writing, "There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering."
A Major Hedge in a Changing Industry
"This is an extremely aggressive move on EA's part," says David Cole, president of San Diego's DFC Intelligence, a market research and consulting firm specializing in the interactive entertainment industry. "It's about how long investors can hold out now. Once GTA ships, Take-Two will have a huge negotiating advantage," he adds. Holding out until after the release would give Take-Two's management tangible proof of the success of its new GTA chapter—and the upper hand in negotiations with a new suitor. But Cole adds a deal of some kind for Take-Two is likely. The industry continues to consolidate as game publishers bulk up to cover the rising costs of developing games, which can easily soar to tens of millions of dollars.
The acquisition would also be a major hedge for EA, enabling it to maintain a dominant position in the rapidly changing games industry. In December, 2007, Activision (ATVI) and Vivendi (VIV.PA) announced an $18.9 billion deal (BusinessWeek.com, 12/4/07) that will hook up the two companies' games divisions later this year, effectively creating the world's No. 1 game maker with estimated revenues of about $3.8 billion. By comparison, Take-Two and EA's combined revenues last year were worth about $4 billion.
In the last 18 months, EA has not been shy about using its checkbook to finance new acquisitions. It is retooling its portfolio of games to include more online multiplayer games and original content. In October, 2007, EA announced the $860 million acquisition (BusinessWeek.com, 10/29/07) of two independent game studios with reputations for creating titles with innovative game play and rich narratives. In 2006, EA spent $76 million to acquire Mythic Entertainment, an independent developer of online games.
More Than Grand Theft Auto
Much of the attention around the potential deal has centered on the upcoming release of GTA IV, the latest in a blockbuster series of games that has sold some 65 million copies since 1997, ranking it among the top 10 best-selling game franchises ever. The most recent title, Grand Theft Auto San Andreas, has sold some 20 million copies to date and GTA IV is widely expected to set new records when it is released at the end of April.
But Take-Two offers EA much more than GTA. Buying the company would also enable EA to strengthen its core lineup of sports games, which includes the Madden NFL franchise. For one, EA would gain control of Take-Two's lucrative line of baseball games, which are officially licensed by Major League Baseball. Besides the major console manufacturers—Sony (SNE), Nintendo (NTDOY), and Microsoft (MSFT)—Take-Two is the only games company that currently has the rights to make MLB-licensed games (the most recent in the series, MLB 2K8, has sold 2 million units to date).
Perhaps more important, buying Take-Two would also allow EA to cut upcoming releases that would compete with its own sports games, including a basketball title due later this year. "The urgency for EA is to acquire Take-Two before it can reinvest its profits from GTA into games that essentially compete with its sports games," says Michael Pachter, a Wedbush Morgan Securities analyst.
A Controversy Generator
But the deal could have its downsides as well. EA could find itself in a bidding war with a major media company looking to make the most of Take-Two's experience distributing its games to retailers. Rumors have been circling for weeks about possible suitors for Take-Two (BusinessWeek.com, 2/8/08). In early February, speculation was rampant that Viacom (VNV) was preparing its own $1.5 billion bid. A number of large media companies, including Time Warner (TWX), have made it clear they want a piece of the booming games market, which is expected to grow 9.1% annually, to $48.9 billion in 2011, according to a report by PricerwaterhouseCoopers.
And swallowing Take-Two's Rockstar Games division could give EA indigestion. Despite enormous success in the market, the company's games have had notably bad media karma. A sexually explicit so-called mini-game in the last Grand Theft Auto caused a worldwide controversy when it was discovered in 2005, invoking the wrath of parents' groups and politicians. The company's Manhunt 2 game has been banned in Britain for excessive violence, while Target (TGT), the second-largest U.S. discount chain, pulled it from stores in November. And another mini-game in the upcoming Grand Theft Auto title could cause further controversy. It challenges players to drive home drunk, without hitting too many pedestrians or other cars. That could raise hackles. "Something like that could be a PR nightmare," says Pachter. "It could bring a lot of unwanted scrutiny, a lot of unwanted attention."
For now, however, it seems the advantages of acquiring Take-Two—booking what are likely to be record revenues from the upcoming Grand Theft Auto release, as well as bolstering the position of EA's own line of sports games—are likely to drive a sale.
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