Electronic Arts Tries to Snatch Take-Two

The video game giant throws a $2.1 billion pitch for the maker of the smash-hit Grand Theft Auto series and exclusive MLB titles

by Matt Vella

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It's all about the games. Electronic Arts' (ERTS) $2.1 billion gambit to acquire Take-Two Interactive Software (TTWO) is a bid to further expand its portfolio of lucrative games by taking control of the blockbuster Grand Theft Auto series as well as popular sports titles including games based on the exclusive Major League Baseball franchise.

But the rich asking price, which drove Take-Two's shares to record Nasdaq stock market gains on Feb. 25, may not be all that's required. EA is offering $26 a share for Take-Two, a 64% premium over the stock's Feb. 15 closing price—the last day it traded before the bid. Take-Two's management rejected the bid on Feb. 22, driving EA to take its pitch directly to investors Feb. 24.

The jockeying is only likely to intensify. Take-Two chairman Strauss Zelnick has said the company would only be ready to talk about acquisition after the Apr. 29 release of the upcoming Grand Theft Auto IV, developed by Take-Two subsidiary Rockstar Games and likely to be one of the biggest games of 2008. In a letter made public yesterday, EA Chief Executive Officer John Riccitiello fired back, writing, "There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering."

A Major Hedge in a Changing Industry

"This is an extremely aggressive move on EA's part," says David Cole, president of San Diego's DFC Intelligence, a market research and consulting firm specializing in the interactive entertainment industry. "It's about how long investors can hold out now. Once GTA ships, Take-Two will have a huge negotiating advantage," he adds. Holding out until after the release would give Take-Two's management tangible proof of the success of its new GTA chapter—and the upper hand in negotiations with a new suitor. But Cole adds a deal of some kind for Take-Two is likely. The industry continues to consolidate as game publishers bulk up to cover the rising costs of developing games, which can easily soar to tens of millions of dollars.

The acquisition would also be a major hedge for EA, enabling it to maintain a dominant position in the rapidly changing games industry. In December, 2007, Activision (ATVI) and Vivendi (VIV.PA) announced an $18.9 billion deal (BusinessWeek.com, 12/4/07) that will hook up the two companies' games divisions later this year, effectively creating the world's No. 1 game maker with estimated revenues of about $3.8 billion. By comparison, Take-Two and EA's combined revenues last year were worth about $4 billion.

In the last 18 months, EA has not been shy about using its checkbook to finance new acquisitions. It is retooling its portfolio of games to include more online multiplayer games and original content. In October, 2007, EA announced the $860 million acquisition (BusinessWeek.com, 10/29/07) of two independent game studios with reputations for creating titles with innovative game play and rich narratives. In 2006, EA spent $76 million to acquire Mythic Entertainment, an independent developer of online games.