Saying that Take-Two Interactive has "lost its way," Wedbush Morgan Securities analyst Michael Pachter this morning downgraded his assessment of the publisher's stock from "hold" to "sell."
"We think that Take-Two’s flagship franchise, Grand Theft Auto, will continue to generate significant profits but are less optimistic about the profit potential from its sports business and from 'everything else,'" Pachter wrote.
While this October's release of Grand Theft Auto IV is a sure-fire hit, Pachter said its sports division is unlikely to ever become significantly profitable, the rest of the company's portfolio is lacking, and its spending is out of control. He also expressed concern over the company's corporate drama in the past year.
Pachter said he likes the company's current management and doesn't think a different group of people could get the publisher in shape any quicker but still laments high turnover over the past two years. Among the departures he mentioned were Rockstar Games co-founder Terry Donovan, Take-Two founder Ryan Brant, and board member Barbara Kazcynski, who took parting shots at the company's management in her resignation letter. He also noted that it wasn't clear if Take-Two's stock option scandal woes were over just yet and said the resulting lack of quarterly financial reports while the company gets its books in order makes it difficult to assess the publisher's progress.
"We think that Take-Two's greatest asset is also its greatest liability," Pachter said. "The company has an environment conducive to creativity and reaps tremendous benefits from allowing its creative staff to work on what it thinks will work. This has resulted in the creation of the greatest franchise in video game history and a number of other highly rated and commercially successful games. It has also resulted in the inclusion of sexual content (hot coffee) in the company’s flagship brand, the decision to enter the sports business and compete with an 800-pound gorilla named EA, the decision to green light a slew of movie properties with consistently poor results, and several other decisions with poor outcomes. To the extent that a new management team tried to rein in the generation of bad ideas, it would risk reining in the generation of the next GTA-like idea."
Pachter also evaluated the chances of the company being acquired, broken up and sold in pieces, or being taken over by activist investors. While he described all three scenarios as "unlikely," he did suggest that the publisher's currently unprofitable 2K Sports operation might be an acquisition target for its fiercest rival, Electronic Arts. According to Pachter, EA is the most likely buyer for 2K Sports because few others would be willing to go head-to-head with the Madden NFL publisher in the sports genre.
"It is clear to us that Take-Two’s sports business would have tremendous value to EA, as it would give EA a monopoly on football, basketball, baseball, and hockey," Pachter said. "It is arguable that EA would benefit by as much as $1 billion if it were to obtain an exclusive; this does not mean that it is willing to pay $1 billion."
Given the few potential suitors who would be interested in going toe-to-toe with EA in the sports genre, Pachter said EA could pick up the division for roughly $200 million. An EA representative declined to comment on the speculation, while a Take-Two spokesperson had not returned GameSpot's request for comment as of press time.