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EA sheds (very little) light on bid for Take-Two

In a conference call with industry analysts, Electronic Arts says its eagerness to acquire the Grand Theft Auto publisher's M-rated catalog isn't new.

Electronic Arts' conference call explained just a bit more about its takeover bid for Take-Two Interactive Software, maker of the Grand Theft Auto game franchise.
Take-Two's Rockstar Games division

I'm not usually one to get up for something happening at 5 a.m. PT, but in the case of this morning's Electronic Arts conference call to discuss its proposed $2 billion takeover bid of Take-Two Interactive Software, I made an exception.

That's because I assumed that EA might provide some new piece of information that would materially enhance details of the game maker's Sunday bid announcement.

My mistake.

In reality, the EA conference call, which lasted nearly an hour, was largely a rehashing of the information the company published in its Sunday press release, accentuated by some more detail on the financial aspects of the deal--in particular the $26 a share it is offering Take-Two shareholders--as well as some thoughts by EA's CEO, John Riccitiello, on timing.

Most notably, though, EA did not address the question I was most curious about: the necessity of making some big acquisition to maintain its top-dog spot in the video game-publishing industry after Vivendi's announced mammoth purchase of Activision in December.

And while all the questions asked on the call were by financial analysts interested more in the bottom-line reasoning for the takeover bid, I was a little surprised that none asked the Activision question. I would have asked it myself, but reporters are never allowed--in my experience--to ask questions on this kind of conference call.

Riccitiello did make one comment as to the timing of the acquisition offer that, on its face, would suggest that EA's interest in Take-Two, publishers of the hugely popular Grand Theft Auto franchise, was not strictly based on the need to maintain the No. 1 position.

He pointed out that he had been in discussions with Take-Two management last year and that he had been interested in making a deal like this happen as early as last spring but decided to wait to make any kind of offer until the completion of the EA reorganization it announced last June, in which it split the company into four distinct labels: The Sims, EA Sports, EA Games, and EA Casual Entertainment.

If true, that would be an interesting piece of information.

"The Activision-Vivendi transaction provides some competitive incentive for EA to add scale and bolster its product portfolio," Colin Sebastian, a video game industry analyst with Lazard Capital Markets, said in an e-mail to me shortly after the EA call, "though it also appears in this case that EA and Take-Two had discussions long before the Activision announcement."

Fair enough.

Riccitiello talked a little bit about the timing of the actual offer, saying he and Take-Two Chairman Strauss Zelnick had had discussions about a potential merger, but that in January, Take-Two rejected EA's interest.

The EA chief executive also said he wanted to make sure, in his company's timing of its Take-Two bid, that it didn't mess with the creative process surrounding Take-Two's most valuable asset, the forthcoming Grand Theft Auto IV, which is scheduled to ship April 29.

"We...wanted to give a wide berth to GTA," Riccitiello said. "We didn't want, in any way, shape, or form, to get in the way...We wanted to see it come out on time so we get our shot at it."

That certainly makes sense, since that game, the first major follow-up to Grand Theft Auto: San Andreas, one of the best-selling console games of all time, is very likely to be a huge financial success.

And in fact, one of the most interesting things Riccitiello said on the call had a lot to do with the specific tenor of the content in the GTA franchise.

Those games are rated "M" by the Entertainment Software Rating Board, meaning that they are limited to being sold to those ages 17 and older. Never mind the "Hot Coffee" scandal of 2005, in which Take-Two was accused of hiding sexual content in its code, which ultimately made the game "AO," or adults-only.

The deal would "advance us particularly in our (market) segment shares," Riccitiello said at one point in the call. "We're notably (unpositioned) in M-rated content. This (would) give us the best M-rated content" in the business.

EA's chief financial officer, Warren Jenson, also gave a little more specific insight into the timing of EA's actual acquisition bid.

He echoed Riccitiello in saying EA and Take-Two had had conversations for about a year, and that in January, Take-Two said it would decline to negotiate a deal.

Jenson added that on February 6, EA made a formal proposal of $25 a share, which Take-Two officially rejected on February 15.

On February 19, EA upped its bid to the current $26 a share.

"It is our intention to make this a friendly deal," Jenson said. "Our next step is to sit down with Take-Two's management and get a deal done."

But he also made it clear that the company's wallet will have only $2 billion in it to offer Take-Two for a short time.

"The longer we wait, the value will disappear," Jenson said.

Riccitiello expanded on that thought a little later in the call.

"We actually think this is a depreciating asset from this point forward," Riccitiello said, alluding to the theory that once GTA IV is published, Take-Two will have to get by on the sales of its weaker games and that EA won't be there to rescue it if Take-Two doesn't play ball.