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EA vs Take Two: Now They’re Talking

takeover talkThe gloves came off today in Electronic Arts protracted hostile takeover effort to acquire Take Two but in a surprise twist, it wasn’t an escalation but rather a move toward a possible handshake and reconciliation.

EA announced they will allow their Tender Offer to expire tonight at midnight as planned.  Take Two, in turn, will include EA in their discussions about “Strategic Alternatives.”    As part of that dialogue, Take Two will provide EA with a formal presentation that includes non public product pipeline and financial projections.

The two companies talking amicably opens the door to the prospect of a possible friendly acquisition.

Timing is everything.

historical stockWhen EA set out to acquire Take Two in February, Take Two stock was trading near $15 a share.  EA’s offer was predicated on two deadlines, one soft and one firm.  The first was the ambitious hope reach an agreement before Take Two’s blockbuster title, Grand Theft Auto, debuted at retail.  Such an opportunistic agreement would have mitigated the effects of the games retail performance on speculative stock trading, and by extension, also made shareholder approval easier to obtain (Speculative trading based on strong retail numbers can drive up the stocks price beyond what might be a fundamentally sound valuation. The elevated share prices, in turn raise shareholder expectations).

EA’s second deadline was the holiday shopping season when the bulk of the gaming industry’s sales occur.   EA wanted to close any acquisition, and hopefully have it be accretive, prior to that period.

The first deadline came and went and now the second one borders on being impossible too (It took Activision from December to July to close their merger with Vivendi Games).  With neither attainable, the urgency to complete the deal is gone.

Take Two shareholders hoping for continued independence don’t have cause to celebrate just yet, however.  EA’s decision to let the Tender Offer lapse, and the companies’ willingness to talk, doesn’t mean a deal (either friendly, or hostile) won’t happen.   From here a potential deal could go in a number of different directions.

One option is a friendly merger.  With common ground in sports games, and major brands on both sides, a combination would bring substantial value to both companies through cost savings, consolidated marketing and distribution, and the joint product catalog.    The deal would also return EA (and with them Take Two) to the throne as the world’s largest independent publisher.  (A seat lost by the combination of Activision and Vivendi Games into Activision Blizzard. Deal closed in July).

A second option is a return to hostile territory.    Simply stated  – allowing the Tender Offer to lapse doesn’t preclude EA from making another attempt down the road.

A third option is that EA walks away and Take Two remains independent, or alternately puts together some other combination with another partner (there are only a few companies that can afford to acquire Take Two at upwards of $2b but a merger of peers isn’t ruled out as an alternate prospect).

Speculation among many watchers is already divided between the three prospects.  Some believe a temporary walkaway (with the threat of it being final) will fuel an adjustment in Take Two’s market value as speculators who bet on the merger liquidate their stock positions.   Other’s believe there’s sufficient value in Take Two’s assets (and game pipeline) to stall any stock sell off.

As for alternate deals, opinions vary as to the prospects. Of the most talked about: within gaming publishers- Activision Blizzard is generally ruled out. They’re too busy with their own transaction. Rivals like THQ or Midway don’t appear to have the wealth or financial health. Ubisoft is thought to be focusing elsewhere. At the console level, Microsoft and Sony are thought to be trying to offload game development expense rather than take it on. The biggest prospect, some think, is conglomerates like Viacom or Time Warner but they may not want the expense or post-merger integration challenges.

Projecting where things go now is a matter of tea leaves and crystal balls.

One fact of note that is significant: Thursday the FTC’s antitrust review of EA’s proposal will be completed.  Assuming no issues are raised, which is the expectation, the absence of the barrier could fast track a potential deal – either one that’s friendly, or by way of a refilled Tender Offer.

It can be difficult for the two sides of a hostile business deal to put aside their issues and work together on a mutually beneficial relationship.  Too much bad blood can be difficult to work around.   For that reason, Rupert Murdoch predicted Yahoo and Microsoft would not find a way back to the deal table.   Here, with EA and Take Two, the same logic could be applied.

In predicting the outcome, however, I’d put odds slightly in favor of a deal.  EA reportedly has good relationships with some of Take Two’s top development studios (notably Rock Star).  EA also has a tremendous appetite for this transaction to occur.

Both Strauss Zelnick and John Riccitiello are experienced executives with significant firsthand experience dealing with M&A transactions.  If a creative solution can be reached, they have the tools to get there.   As it should, it will likely come down to price. 

For those tracking the deal, we’ve assembled a comprehensive chronological deal diary on Metue.  The document outlines the majority of the news announcements since things began in February.  It also includes historical stock prices to lend perspective.   The Deal Diary can be found here.

The following is the text of letters exchanged between EA and Take Two to set up their new dialogue.  Related articles from Metue covering the transaction can be found listed after the jump.

Below is the text of the letter sent today by Mr. Riccitiello to
Mr. Zelnick:

 August 18, 2008

 Mr. Strauss Zelnick
 Executive Chairman of the Board of Directors
 Take-Two Interactive Software, Inc.
 622 Broadway
 New York, NY 10012

 Dear Strauss:

 Thank you for taking my call on Friday and for your response letter
  on August 17, 2008.

 As discussed on Friday, given the passage of time, we have to
  validate the assumptions used in the model to support our offer
  price of $25.74 per share in cash. In addition, we no longer believe
  we can integrate Take-Two ahead of the important holiday season.
  Accordingly, we require due diligence to support a transaction and
  are therefore letting the tender offer expire tonight. However, we
  are pleased to accept your offer to review your management
  presentation as outlined in your letter.

 We continue to have great respect for Take-Two’s creative teams and
  products and are hopeful that we can work together to reach a
  mutually agreed transaction.


 /s/ John Riccitiello
 John Riccitiello
 Chief Executive Officer

Below is the text of the letter sent yesterday by Mr. Zelnick to
Mr. Riccitiello:

 August 17, 2008

 Mr. John S. Riccitiello
 Chief Executive Officer
 Electronic Arts Inc.
 209 Redwood Shores Parkway
 Redwood City, CA 94065

 Dear John:

 Thank you for your recent expression of interest for Electronic Arts
  Inc. ("EA") to participate in Take-Two Interactive Software, Inc.’s
  (the "Company") formal process to evaluate the Company’s strategic
  alternatives. As you know, we have been willing to have EA
  participate in this process following the successful launch of GTA
  IV, and we are happy to include EA now.

 As I mentioned when we spoke on Friday, our process begins with an
  in-depth management presentation. The Company has made significant
  strides since EA first expressed interest in the Company and this
  presentation includes material non-public information to which you
  would not otherwise have access, including information relating to
  our three year product release schedule and management’s financial
  projections. The presentation also includes information about the
  underlying factors that have driven our strong operational and
  financial performance. I believe our presentation will enable you to
  understand better the value of our Company to EA.

 Prior to the management presentation, we will only require EA to
  enter into a confidentiality agreement. The agreement would be
  limited to provisions required to comply with federal securities
  laws and to ensure the Company’s ability to protect the
  confidentiality of the information shared with you. I can assure you
  that this requirement is the same as or more favorable to EA than
  that which we have employed with all other participants in the

 We understand that a number of months have passed since you first
  expressed interest in the Company and, accordingly, we will act
  quickly to assist you in moving through our process. Once we execute
  a confidentiality agreement, we are prepared to schedule the
  management presentation immediately.

 With my best personal regards.


 /s/ Strauss Zelnick
 Strauss Zelnick
 Executive Chairman of the Board


Related Articles from Metue
EA and Take Two Deal Diary: Updated Version Two
Gaming Mergers: Week in Review
GTA IV Sales Stellar But Not Enough to Back EA off?
EA and Take Two: Inside the Deal
Gloves Come Off: TK2 acquisition gets Hostile, EA hits managements wallets
EA Makes $2 Billion Bid for Take Two
July NPD Sales: Video Games Still Selling
Jury Pool: Gibson vs Guitar Hero et all. You Decide the Case
News from E3: Recapping the Game Convention (Part 2 of 2)


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