Prepare For Grand Theft Boardroom

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Prepare for Grand Theft Boardroom

 

EA's efforts to purchase Take Two are moving into hostile territory as the gaming giant is taking its case directly to shareholders, bypassing the board of directors with a buyout price of $26 per share. This deal is similar to the February 24 offer that was made public after Strauss Zelnick, Take Two's chairman of the board, rejected it. Both deals give the Grand Theft Auto developer a valuation of around $2 billion, but this time Zelnick's hands are tied: if the shareholders wish to sell directly to EA, there is little that can be done to stop them.

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Take Two has responded to the offer. "The Board of Directors of Take Two Interactive Software, Inc. today recommended that Take Two stockholders take no action at this time in response to the announcement by Electronic Arts Inc. that it has made an unsolicited conditional tender offer to acquire all of Take Two's outstanding shares of common stock for $26 per share in cash." The company says it will review and evaluate EA's new offer and will subsequently issue a new recommendation along with a justification.

 

The shareholders may be more willing than Zelnick to agree to EA's offer, and in fact one shareholder has already begun litigation against Take Two, alleging that since the company didn't negotiate with EA, it has failed to "maximize shareholder value." Could Take Two have convinced EA to sweeten the deal? It's very possible, in the letters EA was very clear about the value it placed on finishing the deal quickly, and the stock buyout was a cash deal. "If EA really is desperate to land this deal, it could easily afford to raise the bid," Ars noted previously. "These guys have $3.4 billion in cash equivalents and no debt to speak of."

 

Zelnick is going to get paid either way. Last month, the board approved a change in ZelnickMedia's (an investment firm with a significant stake in EA) payment schedule. If the company is sold, its management fees and bonuses will total $16.5 million insted of $3.8 million. In other words, once EA began making moves to acquire the company, the board of directors increased the payout to ZelnickMedia over 400 percent, should EA succeed. The shareholder lawsuit calls this increase, made just nine days after Riccitiello's first letter to Zelnick, "exorbitant."

 

There is also a severance plan for other employees that has been put in place; they stand to get up to 1.5 times their salary for up to 18 months if Take Two is purchased by another company.

 

Take Two still isn't a profitable company; for its most recent quarter, it posted losses of $38 million, compared to a loss of over $21 million a year previous. Preorder activity for the upcoming GTA IV have allowed Take Two to give optimistic guidance for the current quarter. It now expects earnings of $1.00 to $1.10 per share on revenues of between $450 million and $500 million.

 

One factor working in favor of EA's bid is Take Two shareholders' history of taking things into their own hands when they don't agree with management. The current board of directors is in place because the shareholders revolted against the company's previous executive team last March in the wake of the company's $185.9 million losses in 2006 and a stock options backdating scandal.

 

The pressure for Take Two to accept the offer is growing, and with stock trading below EA's $26-a-share offer we could see a major shakeup in the industry if Take Two ends up falling into the hands of the gaming giant. If that happens, EA will basically have the world of sports gaming cornered, as well as control of the influential Rockstar Games. That may not be the best thing for gamers, but one person will have come out far ahead in the deal: Strauss Zelnick.

 

"Take Two's management has rejected EA's offer for $26 per share, claiming that it is not enough. Then it stuffed its own pockets with options and instituted a generous severance plan for employees if the company is taken out," Todd Mitchell of Kaufman Brothers wrote to his clients. If EA remains determined, there is little incentive for Take Two to remain independent.

 

Source(s): http://arstechnica.com/news.ars/post/20080...-boardroom.html