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Monday, February 25, 2008

Electronic Arts (ERTS) bids $26 for Take Two (TTWO)

First they offered $25. Take Two said that's too low. Then they offered $26. That increment is almost obnoxious… but it's also probably correct.

Take Two has a great franchise in Grand Theft Auto, a no-rules shoot 'em up where 12-35 year old males the world over get an outlet for their criminal nature. It's fun. I don't know where the Grand Theft Auto movie is but its inevitable.

Take Two has never successfully translated that success into anything outside of that one game. Their other attempts have been flops of varying degree. Electronic Arts looking to buy Take Two seems both consistent and at odds with their model.

On one hand, they're a franchise company – sports titles, the majority of their sales, get a product refresh on an annual basis. The annual refresh has the benefit of keeping them at the cutting edge of game development and creates a virtual recurring revenue stream as sports fans want current line-ups to enhance their vicarious thrill.

On the other, Grand Theft Auto is a highly controversial title. It's been blamed for inspiring a handful of disturbed teens to shoot people. The last revision was rated for mature audiences only. It's not the kind of image one associates with Electronic Arts. In some respects, you're a bad guy if you market GTA to the same crowd you market Harry Potter to.

The franchise risk is too great for another player without a vast library of recurring titles to offset the potential foibles of GTA in the future. Few of the other video game companies have shown an ability to develop and maintain successful franchises – Activision has done it with Guitar Hero but their dependence on it has yet to be tested. They're locked up with Vivendi now and won't get involved in Take Two. There won't be another buyer.

Take Two is stupid to reject the offer. GTA is late in the sequel stage. Sequels open huge and fade fast and the later you are in the franchise, the more that effect tends to be felt. Rockstar Games, the creators of the game, seem almost arrogant in their pursuit of adrenal fantasies. The developers aren't locked up. It will be very difficult for Electronic Arts to hold onto people in the transition as the Rockstars are likely to reject the corporate hegemony wholesale.

Take Two claims the offer comes at exactly the wrong time, as GTA 4 will be a savior for the company stock price. I would point out that Take Two has an almost notorious inability to predict their future. There are few companies that have changed their guidance intra-quarter as much as they have.

Electronic Arts bid $25. Take Two said it was too low. Electronic Arts bid $26. Those are not the increments of a buyer looking to pay any price.

I would sell Take Two here if I owned it.

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