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Take-Two Interactive (TTWO)
Take-Two Won't Be Able to Resist EA's Bear Hug in the End
The three-month old takeover saga between Electronic Arts (EA) (ERTS: Charts, News, Offers) and Take-Two Interactive over control of the latter is apparently going to continue with EA's announcement this morning that it is once again extending its tender offer for Take-Two shares by a month. The price per share that EA is offering to Take-Two shareholders remains the same, $25.74 and the total value of the proposed deal is about $2 billion. By the previous deadline, which expired on Friday, only 8.1% of Take-Two's shares had been tendered and this figure is actually lower than what it was last month by 3.5%, an indication that EA is not having great success in generating traction for its offer among Take-Two shareholder. Regardless of current posturing, should Take-Two shareholders, emboldened by their success so far in keeping EA at bay, expect a much sweetened-offer sooner or later?
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Electronic Arts made its bid for Take-Two public in early February. The latter rejected the offer as too-low and consequently, EA went hostile with its offer and made a direct tender to shareholders. The deadline imposed on Take-Two shareholders by EA to tender their shares has now been extended three times and the latest one will expire on June 16. This situation looks like it has turned into a stalemate with both sides sticking to arguments which can be boiled down into a few sentences. From where EA is sitting, Take-Two is a company that has been mired in a number of scandals over the last several months. First, there was the options-backdating scandal which cost then CEO Paul Eibeler his job, then some accounting irregularities came to light followed by public outrage over hidden sexual content in one of its video-games. Things got so bad at Take-Two early last year that a few institutional shareholders replaced the entire board and hired an investment firm, ZelnickMedia Corp., to run the company. While the company endured this upheaval, its stock took a beating and even under the new management, the company continues to post multi-million dollar losses (e.g. a $38 million dollar loss in the quarter that ended Jan 31st, 2008). Finally, the stock was trading in the mid-teens before EA came along with its $26 bid. Hence, EA believes Take-Two shareholders should be thankful for the generous premium instead of resisting the offer.
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What is Take-Two's response to the EA argument outlined above? It is essentially three words. 'Grand-Theft Auto.' That is of course, the jewel in Take-Two's crown. Grand-Theft Auto is one of the most successful video-game franchises of all time and its latest installment, Grand-Theft Auto IV, which was released on April 29, did an eye-popping $500 million in sales during its first week out, a record for the industry. Take-Two believes that the success of Grand-Theft Auto is one of the big reasons it is worth more than the $26 a share EA is offering. Management also believes that since only 8.1% of shares have been tendered to EA, the vast majority of its shareholders support its assertion that EA's bid undervalues the company.
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So how is all this going to end? It's always hard to predict how a hostile takeover bid ultimately plays out. This is the case especially in the tech sector where suitors such as EA are reluctant to push the envelope too much for the fear that they will alienate the key employees of the target company, which are absolutely essential in a creative business such as the video-game one. Also, the target company can employ various poison-pills which can make it an unattractive acquisition candidate. Having said all that, the odds of this deal ultimately happening are high. Take-Two doesn't have a host of other options. EA is probably the only player in the video-game industry that can digest it and offer the amount that is currently on the table. The company is also way too reliant on the Grand Theft Auto brand (having failed to adequately develop other blockbuster titles) and there is a probably a limit to how long Take-Two can continue to milk it. Plus, even though Grand Theft Auto IV exceeded everybody's sales targets in its first week, it didn't help Take-Two's stock too much which barely moved because of it, suggesting that Wall Street is not over-reacting to its success. EA is going to have raise its bid too, but probably not by more than a couple of dollars. And it will be more a goodwill gesture than anything else because nobody wants an unfriendly takeover deal in the end. A major catalyst in this situation could be regulatory approval. The Federal Trade Commission is currently studying the deal and if it grants its blessing, things could get consummated pretty quickly.
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