IGT Proxy Fight Exposes Slot Machines’ Loss of Pull

International Game Technology Chairman Philip Satre, locked in a fight over board seats, said the world’s largest slot-machine maker has to invest online because young people don’t gamble as much as their parents.

“They won’t sit at a machine for two hours or three hours,” Satre, 63, said in an interview. “It is to me one of the biggest single challenges for the gaming industry, having products that are relevant to this new generation.”

IGT’s slot-machine business and its move into online games are the focus of a battle coming to a head at the March 5 annual meeting. Jason Ader, a New York money manager and former casino analyst, has proposed three nominees to the eight-person board, including ex-Chairman and Chief Executive Officer Charles Mathewson. Among their gripes: IGT has neglected its core business and wasted money on online acquisitions.

Baby boomers, who make up the core player constituency for Las Vegas-based IGT, are gambling less than they used to, Satre said. Younger patrons, meanwhile, spend more money on restaurants, nightclubs and shows, even in casinos, he said. Nevada and New Jersey are among the states moving to legalize online gambling by residents.

Satre, who was CEO of Harrah’s Entertainment until 2003, said the acquisitions of online companies provided needed technology. IGT spent as much as $500 million last year for Double Down Interactive, a maker of casino-like games for Facebook.com. It paid about $115 million in 2011 for Entraction Holdings AB, a European online gambling business.

Forty-six of IGT’s casino-industry customers are offering Double Down’s social games on their websites, according to IGT.

Younger Players

“This is an incredible opportunity for us to take our content that we’ve developed for our bricks and mortar casinos and move it into another space,” Satre said. The goal is to excite younger players through online play and get them to spend more on slots when they do come to casinos, he said.

Proxy adviser Glass Lewis & Co. today recommended investors back one of the Ader group’s nominees, Daniel Silvers, and rejected Mathewson and Ray Brooks, according to statements from the two sides. Institutional Shareholder Services backed Silvers on Feb. 19, while Egan-Jones Proxy Services backed all of the company’s nominees.

In public filings and on the website rescueigt.com, Ader’s group has argued that IGT management, led by CEO Patti Hart, who took over in April 2009, has neglected slot machines and overspent on acquisitions.

Core Business

“IGT’s core business has historically been relatively straightforward -- it designs, manufactures and distributes slot machines and systems to casino operators,” Ader’s group said in a presentation to stockholders released this month.

Innovations, such as slots that spit out paper vouchers instead of coins, helped IGT double North America machine sales in the first half of the 2000s, according to the presentation.

The stock is down about 30 percent from an October 2009 high under Hart, compared with a 37 percent increase for the S&P 500 Index over that time. The dissidents say the stock has underperformed the market since the Double Down acquisition.

IGT rose 0.4 percent to $15.89 at the close in New York. It has gained 12 percent this year, beating the S&P 500’s 6.3 percent advance.

Large casino companies aren’t replacing machines as fast as they used to. Total sales of slot machines in North America fell to 61,979 in 2010 from a recent peak of 136,619 in 2004, according to Eilers Research LLC, based in Anaheim Hills, California. Last year’s sales totaled 90,447.

Major Customer

James Murren, chairman and chief executive of MGM Resorts International, the largest operator on the Las Vegas Strip and an IGT customer, said his company has been looking for ways to extend the life of existing models.

“We’re not going to discard a machine after five years,” Murren said in an interview. “It’s a symptom of a broader issue, which is the manufacturing industry is rapidly changing. The traditional model of selling boxes to operators is obsolete.”

Mathewson, 83, who served as IGT’s chairman until 2003, doesn’t dispute the company’s need to invest in online games. Management could have done so more cheaply by developing know-how in-house, he said in an interview.

IGT shut down the online poker business of Entraction in September, a year after buying the company. While Mathewson says that indicates management hadn’t done enough research on the business, Satre counters that the company is keeping some of the talent, which will be redeployed.

Satre also said management is taking steps to rebuild its share of the North American slot machine business, which shrank to 29 percent in 2010 from 66 percent seven years earlier, according to Eilers. IGT’s share last year was 36 percent.

“This company was in a precipitous decline in performance and it wasn’t just the recession,” Satre said.

The company has also seen an increase in customers identifying IGT as producing the highest winnings per machine.

“We have regained share in our core products,” Satre said. “We built up our studios. We brought in talent.”

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