Electronic Arts awaits investor reaction to its bid for Take-Two
By Matt Richtel, Andrew Ross Sorkin and Seth Schiesel The New York Times
Monday, February 25, 2008
With Take-Two Interactive Software declining the unsolicited $2 billion takeover offer by the rival video game company Electronic Arts, both companies are anxious for the investor reaction to financial terms that can be viewed from vastly different perspectives.
The $26 offer by Electronic Arts for Take-Two seems, on its face, to be a hefty premium over the $17.01 close of Take-Two's stock on Friday. But that premium is deceiving, according to Strauss Zelnick, executive chairman of Take-Two, publisher of the "Grand Theft Auto" franchise. During an interview Sunday, Zelnick pointed out that the offer was not much above Take-Two's 52-week high of $24.80, and he noted that taking a snapshot of Take Two's stock on a given day ignores the volatility both of his company's shares and that of the industry overall.
Zelnick also said that his company was in the middle of a significant turnaround project and that it would be distracting and short-sighted of Take-Two to consider a buyout offer before the April 29 release of the next edition of "Grand Theft Auto."
Indeed, Zelnick said Take-Two had asked Electronic Arts to keep its buyout offer private - partly because the offer would be a distraction, partly because Take-Two had little incentive to accept a buyout before the release of "Grand Theft Auto."
Take-Two's fortunes have been tied tightly to the huge success of the "Grand Theft Auto" franchise and so a release of a new version of the game is perceived by investors who like the stock as a potential moment of payoff for the many relatively lean moments in between. If it lives up to consumers' expectations, the game is expected to sell 10 million copies or more by the end of the year, which would almost certainly make Take-Two more expensive.
"I'm not thrilled EA decided to be public about this," Zelnick said. "GTA comes out on April 29. We're happy to have a meaningful discussion afterward."
Electronic Arts said it was making its offer public to "bring its proposal to the attention of all Take-Two shareholders."
John Riccitiello, chief executive of Electronic Arts, said Sunday, "It is an enormous premium," suggesting that rather than consider the offer hostile, "We think of ourselves as a 'white knight.' "
Electronic Arts, which publishes hit games like the "Madden NFL" and "Need for Speed" series, said it wanted to make the offer public so that Take-Two shareholders could be aware of the situation. Translation: Let's test the market and find out whether Take-Two investors, many of them doubtless frustrated by the ups and downs of Take Two's struggles the last few years, might be tempted to support more stability.
Zelnick seems equally interested in what Wall Street has to say.
"We'll want to hear from our shareholders to make sure our view is reflected in their view," he said.
Over the next several weeks, Riccitiello's main challenge will be to persuade investors to accept the deal and convince employees that Electronic Arts will respect the creative autonomy of Take-Two's development teams. Over the last decade, EA has acquired many high-profile game studios, including Westwood (the "Command & Conquer" series), Bullfrog Productions ("Populous") and Origin Systems ("Ultima"), which essentially dissolved after Electronic Arts tried to direct and homogenize their creative output.
Of equal interest - at least from the perspective of people who follow the industry closely - is what will happen to the stock of Electronic Arts. The company's proposal to buy Take-Two might be seen as a stark admission that the once unchallenged industry leader is under even greater duress than it has let on - and it has let on plenty. The company's executives have said they believe Electronic Arts needs to make major investments to spur significant growth.
The video game maker Activision has strongly challenged Electronic Arts' dominance. Not only has Activision had a recent string of hits, notably "Guitar Hero," it also recently agreed to buy Vivendi's game division.
At the same time, EA has endured growing criticism from some investors who say the company has lost its creative and innovative edge. There is little doubt that EA remains the juggernaut of the video game industry. But it has come to rely heavily on sequels.
A merger with Take-Two would be a union of two vastly different companies. EA has a reputation for steady growth and fiscal discipline, while Take-Two is known as a mercurial one-hit wonder. Take Two's long-standing troubles - regulatory and legal - would long have seemed to make it an ill fit for Electronic Arts, which enjoys a squeaky clean, Disney-like reputation. For Electronic Arts to pursue such a deal, the company may be acknowledging that finding the growth it so desperately craves may be proving much more elusively than it hoped.
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