Take-Two says no to Electronic Arts

NEW YORK (AP) - February 26, 2008 The offer is "the wrong price at the wrong time," Take-Two Interactive Software Inc. chief executive Ben Feder said Monday after the news of the $26-per-share bid sent Take-Two's shares up 55 percent to a $26.89 close.

Electronic Arts is undervaluing Take-Two and not factoring in the benefits of its recent turnaround efforts, Feder said in an interview. Take-Two said it is open to discussions with EA, but wants to wait until April 30, the day after the latest version of Grand Theft Auto hits store shelves.

But analysts said Take-Two may not have the luxury of time. While Take-Two wants a higher price, EA could make this bid hostile, or walk away and come back with a lower offer, they said. "There can be no certainty that in the future EA or any other buyer would pay the premium we are proposing today," EA's CEO John Riccitiello said during a conference call.

"We believe our proposal is fully priced," he said. Since "Grand Theft Auto IV" should by now be essentially complete, he added, the buyout bid "would not jeopardize the development of this incredibly important title."

GTA has sold more than 65 million copies in the decade since the first game in the series, where players complete gritty crime missions to rise to the top.

Take-Two called the timing of EA's unsolicited offer "opportunistic" because it is so close to the launch date of the new version of GTA. Redwood City, Calif.-based EA says it wants to act now so that it can get its marketing muscle behind GTA before the holiday season, when video game companies make most of their money.

EA's offer represents a 64 percent premium over Take-Two's closing stock price of $15.83 on Feb. 15, the last trading day before the company made its latest proposal, privately, to Take-Two. EA, which said it has been in talks with Take-Two on and off for about a year, offered $26 per share on Tuesday, Feb. 19, after Take-Two rejected a $25-per-share bid on Feb. 15. EA went public with the higher bid on Sunday.

Citi Investment Research analyst Brent Thill said EA "may be willing to pay slightly, but not materially, higher than its current offer."

While much of Wall Street's and gamers' focus Monday was on Grand Theft Auto, Michael Pachter, an analyst with Wedbush Morgan Securities, said it's Take-Two's sports business that's the most lucrative for EA.

"The whole world seems to think this is GTA and nothing else," he said, adding that the franchise "is the best asset for everybody except EA."

"For EA, the best asset is sports," he said. "And that's why there won't be a higher offer (from another company). No one else will value sports higher."

EA, which owns the Madden NFL and FIFA Soccer franchises, would round out its holdings with Take-Two's baseball, basketball and hockey titles to dominate the sports game arena.

Even if EA wins Take-Two, it isn't clear whether the brothers who helped create "Grand Theft Auto" will stay on. Sam and Dan Houser, who lead Take-Two's Rockstar Games label, are under contract with the company only until next year. Sam Houser could not be reached for comment Monday and Take-Two would not comment on what it said was a confidential matter.

Thill said, however, he thinks there is "considerable value" for a development studio to tap into EA's financial, marketing and distribution resources.

Josh Resnick the co-founder and general manager of Pandemic Studios, which EA recently acquired along with BioWare Corp. for $860 million, agreed. He said Riccitiello quickly allayed concerns about the studio being able to maintain creative control and independence.

"John is one of those rare executives in the games industry who really gets it" he said.

Since taking EA's helm a year ago, Riccitiello has reorganized the company into a "city-state model," with four divisions and distinct, independent studios. His vision, Resnick said, has allowed studios like Pandemic to "have the freedom and flexibility to do what they need to do to make great products."

In an interesting twist, Take-Two amended its management contract with ZelnickMedia Corp. on Feb. 14, a day before it privately rejected EA's first offer. Feder and Chairman Strauss Zelnick are ZelnickMedia's founding partners.

The changes, which Take-Two disclosed in a filing with the Securities and Exchange Commission, increase the monthly management fee paid to ZelnickMedia to $208,333 from $62,500 and raise the maximum annual bonus ZelnickMedia can receive to $2.5 million from $750,000.

Take-Two's board also granted 600,000 in restricted shares to ZelnickMedia that will vest in equal installments over three years. But if the management contract is terminated or if there is a "change in control" of the company, that is, if Take-Two is bought out, the stock awards vest "in full immediately" before such a change takes place, Take-Two said in the regulatory filing dated Feb. 14.

Feder and Zelnick took Take-Two's helm last year after a March shareholder coup ousted most of the company's top executives and board members over poor results, accounting troubles and controversy surrounding violent and sexual content in the company's games.

Several former Take-Two executives, including Chairman and CEO Ryan A. Brant, pleaded guilty in 2007 to falsifying business records in connection with a probe into backdated stock options.

Shares of Electronic Arts fell $2.60, or 5.2 percent, to close at $47.14.