Electronic Arts takes plan to investors
The battle for the future of Take-Two Interactive broke out Monday, as Electronic Arts took its $2 billion acquisition plan to investors but the “Grand Theft Auto” publisher’s leadership team urged them to reject it.
EA held a conference call Monday morning to announce its intentions, with CEO John Riccitiello declaring that his “objective is to make this a friendly deal.”
But that seems highly unlikely, given Take-Two’s response.
After rejecting the bid as too low on Sunday, chairman Strauss Zelnick made clear how he felt about EA’s public move on Monday.
“The time is wrong, and the value remains insufficient,” he said in an interview. “The timing is out of our control now that this is in the public eye, but the fact remains that the value is woefully inadequate.”
In a letter Friday rejecting the EA offer when it was presented privately, Take-Two’s board said it would be willing to further negotiate an acquisition after “Grand Theft Auto IV” comes out on April 29. But EA clearly wants to finalize a deal before the release of “GTA IV,” a strategy that will apparently sour Take-Two’s interest in a future deal.
“As a public company, one has an obligation to talk to legitimate interested parties at any time, but once an offer goes public, the tenor changes,” Zelnick said. “We’ve seen what is on the table, and we’ve already rejected it. There’s not much else for us to do right now but listen to our shareholders and the market.”
The timing of EA’s deal was also hotly debated Monday, with some observers questioning whether EA’s offer was an attempt to distract Take-Two prior to the release of “GTA IV.”
It was revealed Monday that EA came close to making a deal with Take-Two last year, just before Zelnick and CEO Ben Feder took over. But it pulled out at the last minute when Riccitiello, then new to his job, decided that EA needed to go through a restructuring before it could effectively integrate Take-Two.
A source close to Take-Two noted that that experience was causing many at the publisher to question EA’s intentions and wonder whether it was using an offer it knew wouldn’t be accepted to distract its competitor prior to the release of the high-profile game.
EA, however, said it decided to make its play now because nearly all the work on that game is done and it wants to move quickly to take control of Take-Two before the holiday season.
“From this point forward, releasing (‘GTA’) is essentially mechanical,” said Riccitiello. “There can be no legitimate business reason whatsoever not to go forward with this transaction now.”
But Zelnick adamantly disputed EA’s position.
“It’s not just fully baked and ready to go with the push of a button,” he told Daily Variety. “To present it as such is a little naive.”
Zelnick declined to comment on whether Take-Two is in active talks with other potential buyers, though it’s widely believed some publishers and traditional media companies have considered buying it.
On Monday, however, several analysts said that with Activision, the only other publisher as big as EA, currently in the midst of a merger with Vivendi Games, it’s unlikely anybody else would offer as much.
That’s because EA would gain significant efficiencies, estimated by BMO Capital Markets at between $50 million and $100 million, by combining the two companies’ infrastructures. In the Monday call, Riccitiello cited several Take-Two properties he believes would perform better as part of EA.
“I wouldn’t change a line of code in ‘Bioshock,’ and the same goes for ‘GTA’ and ‘Max Payne,’ ” he said. “What we would do is sell more of them. Given our scale, we have substantial operations in places we don’t believe they have ever visited. … That allows us to sell more software and do so more efficiently.”
Analysts also noted that EA would benefit by merging its sports games unit with that of Take-Two, its biggest competitor in the space.
“It appears to us that the basis for this offer is primarily the synergies to be gained from combining Take-Two’s and EA’s sports businesses,” wrote Wedbush Morgan analyst Michael Pachter in a research note. “We believe that by combining the two businesses, EA would be in a position to grow its sports revenues by an immediate $300 million while streamlining its cost structure to eliminate the redundancies of two separate studios creating games in (the basketball, hockey and baseball) genres.”
Many Wall Streeters were concerned, however, that EA may not be able to retain the heads of Take-Two’s Rockstar subsid, which develops the “Grand Theft Auto” games. Though EA would still get rights to the “GTA” franchise in an acquisition, it’s not clear whether top execs including Dan and Sam Houser would stay.
Riccitiello said he hasn’t been able to talk to the Housers as part of the buyout offer, but he’s hopeful they would stay.
“EA’s label structure is in many ways inspired by the work of Rockstar and Sam Houser, so I think we represent a great home for them,” he noted. “We see them as a key asset. They have certainly gone through things tougher than this.”
Wall Street made clear, however, that it expects somebody to end up buying Take-Two and at a price even higher than the $26 per share EA is currently offering. Company shares surged 55% Monday and closed at $26.89.
The fight for Take-Two increased investors’ sense that more acquisitions are coming soon to the vidgame biz, sending shares in other small publishers up as well. THQ rose 10%, while Atari shares were up 13% and Sumner Redstone-controlled Midway got a 7% boost.
The only major vidgame publisher to take a hit Monday was Electronic Arts. Its stock dropped 5%, reflecting investor concern over whether it will be able to complete the deal and integrate Take-Two effectively.