Electronic Arts Offers $2 Billion for Take-Two

Unsolicited Bid Signals Videogames Consolidation Is the Play of the Moment

Wall Street Journal

Nick Wingfield, February 25, 2008

Rough-and-tumble tactics are common in popular videogames like Electronic Arts Inc.'s Madden NFL. Now the company has launched a blitz against one of its top competitors.

EA made an unsolicited $2 billion cash offer to buy Take-Two Interactive Software Inc., publisher of the hit Grand Theft Auto videogame, in the latest sign of consolidation in the games business.

EA, of Redwood City, Calif., yesterday said it was making public an offer of $26 a share for Take-Two after that company's board last week rejected the proposal as insufficient. Take-Two swiftly reiterated its negative opinion of the transaction.

The offer is a 50% premium over the closing price of Take-Two's shares Friday. EA said it was a 63% premium over Take-Two's average share price in the 30 trading days preceding Feb. 15, the last trading day before EA made its $26 a share offer.

The move comes at a time when one of EA's closest rivals, Activision Inc., is merging with the games unit of Vivendi SA to create Activision Blizzard Inc., a powerhouse with properties spanning the Guitar Hero series of music games to the hit online title, World of Warcraft. The consolidation of bigger players may put further pressure on smaller game developers to sell out to big entities, including media companies that are upping their investments in games.

EA's action follows an even bigger bid by Microsoft Corp. for Yahoo Inc., continuing a new trend of unsolicited offers in the maturing tech sector. Such companies had long stuck to negotiated acquisitions, on the theory that unfriendly transactions could spur the departure of talented engineers and programmers that were seen as key assets of target companies.

EA is also the maker of the Sims and other hit games. If its bid succeeds, the company would assume control over Grand Theft Auto, a franchise that is as well known for its controversial depictions of violence as it is for its titanic commercial success. More than 65 million copies of Grand Theft Auto games, which follow characters around gritty urban environments as they steal cars and perform other misdeeds, have been sold since the series was launched.

"This is among the most important franchises in the entire game industry," said John Riccitiello, EA's chief executive.

In an interview, Mr. Riccitiello described Take-Two as an "enormously attractive asset" that would find a better home at EA, a larger publisher with more extensive distribution networks abroad and the ability to more fully exploit Take-Two game properties on, for example, newer game devices like mobile phones. He said Take-Two as a standalone company faces substantial risk because of the increasingly high cost of game development and other factors.

Such unsolicited bids are often characterized as "bear hugs," since they aren't overtly hostile but are unwanted and difficult to escape. "We're a friendly bear," Mr. Riccitiello said. Characterizing the company's premium as generous, he added, "that's not an unfriendly transaction."

EA's offer comes about two months before Take-Two plans to ship Grand Theft Auto IV, one of the most eagerly anticipated games of the year. In an interview, Strauss Zelnick, the chairman of Take-Two, described EA's offer as "opportunistic" since the shares of game companies and other purveyors of entertainment often trade up in the months before the release of a big entertainment property.

"Had the offer been made at a price that was compelling from a value point-of-view, naturally, good governance would suggest we would have considered it," Mr. Zelnick said. "This offer is woefully undervalued."

Mr. Zelnick said Rockstar Games, the Take-Two group making Grand Theft Auto, is still working on the game and that discussions with EA would be a distraction from completing the title. In a press release, Take-Two said it offered to initiate further discussions with EA about a deal on April 30, the day after Grand Theft Auto IV ships, in order to stay focused on the game.

Take-Two's current management was installed after a revolt by dissident shareholders, who in March 2007 started a proxy fight and voted in a new slate of directors.

Ryan Brant, who founded the company in 1993 and served as chief executive until 2001 and chairman until 2004, in February 2007 pleaded guilty to criminal charges associated with stock options backdating.

Earlier, Take-Two was investigated by the Securities and Exchange Commission over its accounting practices. In 2005, the company agreed to pay $7.5 million to settle SEC charges that it "parked" copies of games with distributors during fiscal 2000 and 2001, inflating revenue by booking shipments of games that it later took back as returns.

EA said its pursuit of Take-Two stretches back nearly a year to the time the dissident Take-Two shareholders were attacking the poor financial performance of the company. In March of last year, Take-Two publicly disclosed that it was considering a sale of the company, and Mr. Riccitiello confirmed yesterday that EA was "very close" to acquiring Take-Two then.

But Mr. Riccitiello said he helped put the brakes on the deal at the time. In March, Mr. Riccitiello was acting as an adviser to EA in the time between his appointment as EA's new CEO in late February and his official start in that job in April. Mr. Riccitiello said he wanted to focus on reorganizing EA when he got to the company, instead of digesting Take-Two.

EA said it resumed discussions with Take-Two in December and offered the company $25 a share on Feb. 6, which Take-Two rejected on Feb. 15. EA boosted its offer to $26 a share on Feb. 19 and Take-Two rejected that proposal Feb. 22.

For EA, a deal could help it with a plan to reverse a recent loss in market share for its games because of the relatively weak performance of some key titles.

Michael Pachter, an analyst at Wedbush Morgan Securities, believes EA's bid for Take-Two was prompted in part by EA's desire to protect its important sports videogames business. Take-Two is one of its few credible competitors in sports games, and Mr. Pachter predicted that EA could use superior sports developers from Take-Two or shut down rival games to eliminate competition.

Jeff Brown, an EA spokesman, denies that sports motivated EA's offer. "Sports is a very small part of Take-Two, and they have a lot of other great assets," Mr. Brown says.

A big risk for EA, if the deal succeeds, is that it may not be able to retain key talent, including the team behind Grand Theft Auto. The creative direction of the game is still overseen, in part, by two brothers who helped invent the series, Sam and Dan Houser of Rockstar Games. Mr. Riccitiello, who says he knows the Housers well, says he hasn't discussed EA's offer with them.

Write to Nick Wingfield at nick.wingfield@wsj.com