EA tries to buy Take-Two to keep its top spot

Electronic Arts launches uninvited $2 billion bid for the 'Grand Theft Auto' publisher in what is surely an attempt to trump Vivendi's purchase of Activision.

The forthcoming 'Grand Theft Auto IV,' which is scheduled to be released on April 29, would be a feather in Electronic Arts' cap if it can successfully buy Take-Two. Rockstar Games

In a startling bit of news, Electronic Arts announced Sunday morning that it has launched an uninvited bid to buy Grand Theft Auto video game franchise publisher Take-Two Interactive Software for $26 a share, or what could be a $2 billion deal.

And while EA, in its press release, did not make any reference to Vivendi's December agreement to purchase Activision , there can be no doubt that this is the response EA had to make to keep its spot as the undisputed heavyweight champion of the video games business.

The announcement comes on the heels of what appears to be a spurned attempt at a friendly takeover of Take-Two at $25 a share. The announcement release included the text of a letter sent to Take-Two Executive Chairman Strauss Zelnick by EA CEO John Riccitiello.

"Dear Strauss," Riccitiello wrote in the February 19 letter, "I am disappointed that you have rejected Electronic Arts' $25 per share cash offer to acquire Take-Two Interactive Software...and declined to engage in the friendly negotiations we proposed. We continue to believe that an acquisition of Take-Two by EA is in the best interests of your shareholders, employees and other constituents, and we remain interested in acquiring Take-Two. So to further demonstrate our seriousness and encourage you to move forward now, I am writing to increase EA's offer to acquire all of the outstanding shares of Take-Two to $26 per share in cash."

Riccitiello's offer asserted that it would expire on February 22, which was Friday. The announcement and the publication of the February 19 letter appears to be a strategic--and possibly a legally required--move aimed at putting shareholder pressure on Take-Two to accept the offer.

EA will hold a conference call Monday morning to discuss the Take-Two offer.

What seems certain is that EA's board felt that it had to do something to counter Vivendi's Activision purchase, a move that would have potentially made that combined company, known as Activision Blizzard--since Vivendi's biggest video game holdings was World of Warcraft publisher Blizzard Entertainment--the world's largest video game publisher.

For years, EA has held that top spot and has prided itself on being No. 1. So, if anyone is surprised that EA has now made a move that would likely re-establish its king-of-the-hill position, they haven't been paying attention.

Take-Two, of course, is an interesting choice as the potential acquisition to cement that position. The company is big, of course, and its flagship Grand Theft Auto franchise is worth huge money. And that's particularly true because the latest GTA title, Grand Theft Auto IV, is scheduled to be released on April 29 and will surely do gigantic business. EA would certainly like to get its hand on that revenue.

But Take-Two has also been the subject of numerous regulatory slaps-on-the-hand, most notably due to the sexual content hidden in its monstrously-popular Grand Theft Auto: San Andreas. The so-called "Hot Coffee" scandal in 2005 led to that game being removed from store shelves, and to oratorical chest thumping from the likes of Sen. Hillary Clinton about the destructive nature of video games.

Still, big bucks is what it's all about, and despite its problems, Take-Two is still around, and, as noted above, is about to reap the windfall of the forthcoming GTA IV release. Presumably, EA could temper any criticisms of buying a controversial company like Take-Two by promising more oversight and moral control, though one wonders how much control a Redwood Shores, Calif., company could really exercise over a fiercely independent New York company like the $1.29 billion Take-Two.

This sounds like a battle that will be played out in the press--hi, there, I'll be your messenger for this battle--and could force EA to raise its offer even more. Take-Two, unlike Yahoo in the case of Microsoft's bid to buy it, is in pretty good shape, with its stock, at about $17 a share, in the mid-range of a yearly range of $11.82 to $24.80.

Of course, these types of battles being what they are, EA's publication of its letter and its offer puts pressure on Take-Two to accept what is a premium over its share price. The alternative, EA hinted at, is shareholder lawsuits against Take-Two's management if they choose not to accept that premium.

"There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering today," Riccitiello wrote in his February 19 letter. "We want to work with you and your team to complete the transaction in time to begin realizing its significant marketplace benefits in advance of this year's holiday selling season."

One might think, as I do, that what EA is really saying with that statement is that it wants to be the owner when Grand Theft Auto IV is released, the green starts rolling in and Take-Two's stock skyrockets.

But Riccitiello suggested he thinks that Wall Street has already taken that revenue into account.

"We believe Take-Two's current share price already reflects investor expectations for a strong release of GTA IV as well as the longer-term issues that Take-Two faces," the EA CEO wrote. "Once GTA IV ships, Take-Two will again be dependent on less-popular titles and face increasing challenges to compete with larger and better-capitalized competitors."

Like, um, EA, for example.

And, to be sure, there can be no doubt that EA does offer Take-Two a massive distribution and marketing infrastructure that could certainly boost the performance of Grand Theft Auto and Take-Two's other titles.

So, this looks to be the big news in the video game industry for the next few days, at least. I can't claim to have enough insight into the management of either company to be able to predict what Take-Two will ultimately decide to do. That's in part because Take-Two is famously tight-lipped about its business decisions.

But you can be I'll be watching closely. So stay tuned.

 

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