EA Strikes Softer Tone in Take-Two Buyout Talks

The dance between two of the biggest players in the video games sector continues, and it’s taking on a new tone.

Electronic Arts and Take-Two Interactive Software held discussions over the weekend regarding EA’s attempt to acquire Take-Two. EA is best known for sports titles such as the “Madden NFL” series, while Take-Two’s best-known titles include the “Grand Theft Auto” series.

EA first tried to acquire Take-Two about six months ago. Take-Two rejected EA’s cash offer of US$25.74 per share. With that tender offer set to expire Monday, it looks like the two video game giants are talking.

Price Is Wrong

EA will most certainly have to increase its offer price if it wants to acquire Take-Two, said Mike Hickey, an equity analyst with Janco Partners.

“The tender was not successful. Whether it expires is meaningless,” Hickey said. “EA could have continued the tender for another month, but they didn’t. Only 15 percent of the Take-Two shareholders agreed to the tender, which isn’t nearly enough to acquire the company. Take-Two has already said the original tender is not sufficient. If EA wants to close the deal, they’ll have to raise the bid.”

That said, Hickey thinks the deal will eventually get done.

“I think the odds have gone up. Now, they’re in a situation where some of the hostility has gone down,” he said. “Both management teams have agreed to come together and make their respective pitches. I think EA is backing down from being hostile.”

A Powerful Combination

The real winner of any deal between the two companies would be EA, said Todd Greenwald, an equity analyst with Signal Hill Group.

“It would be a good deal for EA because they need the content,” Greenwald said.

Acquiring Take-Two would give EA access to Take-Two’s “Grand Theft Auto” series as well as its “MLB 2K8” title, the latest in a long series of best-selling baseball games. Take-Two has an exclusive license with Major League Baseball, making it the only company able to create games using MLB content.

Take-Two also has National Basketball Association and National Hockey League titles which, combined with EA’s NFL, NHL, NBA and NCAA titles, would make the two companies a powerful combination in the sports game category.

Regulatory Concerns

Any deal between EA and Take-Two will need to be reviewed by the Federal Trade Commission for anticompetitive concerns. However, Janco’s Hickey and Signal Hill’s Greenwald don’t see anticompetitive concerns keeping a deal from going through.

“I think the FTC will approve the deal. I don’t see any real monopoly concerns there,” Greenwald said. “There’s no question the video game sector is competitive. One genre of the sector, the sports category, is dominated by EA and Take-Two. The two together would dominate sports. I don’t know if having a monopoly in one genre would constitute anticompetitive practices.”

Hickey said that there are many games that compete in the sports category.

“I would not expect this to have any sort of FTC problem at all,” he said.

Booming Sector

Overall, the video games sector is in good shape.

“We’re in the sweet spot of the current cycle of game consoles,” Greenwald said. “Right now, the industry is unbelievably healthy. Last year, sales grew 40 percent, and this year, year to date, it’s up 30 percent.”

However, Take-Two is riding a huge wave of success following the release of “Grand Theft Auto IV,” the biggest hit title in company history, Greenwald said, while EA, on the other hand, is struggling a bit.

“A lot of their big sports franchises have gotten a little bit stale,” Greenwald said. “On top of that, their costs have spiraled almost out of control. They’ve invested in a lot of areas and they haven’t seen a return yet.”