Analysts: EA 'overpaying' for Take-Two

Industry watchers boggle over Madden NFL publisher's $2 billion bid for GTA maker, agree stockholders will acquiesce to the deal sooner rather than later; TTWO stock skyrockets 54 percent.

Yesterday, EA decided to put the screws on Take-Two management by making public its erstwhile private $2 billion acquisition offer that would yield an at-the-time princely 64 percent premium to shareholders. Take-Two formerly rejected the proposal on February 19, saying the offer "substantially undervalues" its franchises, creative talent, and consumer loyalty. The publisher also called the proposal's timing opportunistic due to the impending release of surefire hit Grand Theft Auto IV, reasons which have all been formally rebuffed by EA kingpin John Riccitiello. EA has also set up an official Web site to provide a FAQ and other updates on the deal.

Today, industry analysts continue to scratch their heads over why Take-Two's board would turn the offer down, as well as question EA's willingness to drop so much cash on the transitioning publisher. In a company update today, Goldman Sachs analyst Mark Wienkes said that despite popular belief that EA will soon enact a hostile takeover of Take-Two by buying up a majority of outstanding stocks, the publisher will at least raise its bid once more.

"Given all of the moving parts with respect to the assets that may or may not be included in any potential transaction, the relatively small impact to the aggregate offer for each $1 increment to the bid, we think it's rational to expect a higher bid," said Wienkes. EA's initial offer, made in a private letter to Take-Two chairman Strauss Zelnick on February 6 and formally rejected on February 15, offered shareholders a buyout offer of $25 per share. However, Wienkes also cautioned Take-Two with a carpe diem warning, saying "the more protracted this process becomes...the less desirable the target would become, in our view."

In a note titled "Take-Two Declines EA's Offer to Overpay," Pacific Crest Securities analyst Evan Wilson believes that even though EA isn't afraid to reach deep into its pockets, the publisher is squandering its cash by offering so much for Take-Two. "Given that Take-Two's business overlaps EA's in many areas, the uncertainty in the future of the GTA developers, and Take-Two's ongoing legal issues, we believe that EA is willing to pay too high of a price."

To justify the purchase price, Wilson notes that GTAIV must live up to expectations. "For the acquisition to make any financial sense, it needs to be closed in time for EA to realize GTA profits. Without GTA, Take-Two is certainly not worth $2 billion and there is no certainty that the talent behind GTA will stay for the next installment." Wilson also notes that knocking Take-Two out of the sports market would certainly be a boon for the Madden NFL publisher, but "eliminating a competitor in sports brings only a modest benefit."

On the other side of the table, Wilson says that Take-Two shareholders should get behind EA's takeover bid. "EA's $26 offer is more than fair, in our view. [Earnings] of 19x in a GTA year is a significant premium to the historical trading range of second-tier publishers, especially given its struggle to achieve profitability. Given lackluster success outside of GTA, even under current management, the offer exceeds our expectations for TTWO over the next year." Wilson also notes that there are few other publishers in a position to capitalize on what Take-Two can offer, and by dallying, Take-Two's stock outlook has "turned negative since the potential for EA to walk away from its bid is far more significant than the potential upside from a higher bid."

While Wilson feels Take-Two's lack of action is cause for a stock downgrade from "Outperform" to "Sector Perform," Wedbush Morgan Securities analyst Michael Pachter upgraded his stock advisement from "Sell" to "Hold" in a research note this morning. Pachter, who last year outright dismissed speculation of EA offering to buyout Take-Two due to a perceived conflict in corporate culture, unreservedly redressed prior guidance.

"We were shocked and awed by the offer, and our Sell recommendation was wrong," Pachter remarked. "After numerous rumors over the past several years surrounding an acquisition of Take-Two that have been dispelled, a bona fide serious offer has been made. We believe EA fully intends to complete this acquisition, and believe that Take-Two's investors will decide that a sale is the best option for them."

While Pachter laid out the bulk of his reaction to GameSpot yesterday, the verbose analyst lent further insight into the buyout offer today. Rationalizing the deal from Take-Two's perspective, Pachter notes that the deal EA has extended is far better than they'd get from any other media company.

"In our view, the offer is more than adequate," said Pachter. "We agree that Take-Two has several game franchises that have great potential, and acknowledge that its creative talent is as good as any in the industry. However, the company has failed to make a profit for over two years, and although its turnaround efforts are sincere, they have as yet to yield significant results. We believe that EA's offer is significantly higher than the amount that would be paid by a major media company, and think that the company is uniquely positioned to derive synergies from a combination with Take-Two. Other prospective bidders are simply not in the same position to value Take-Two as is EA."

Addressing the likelihood of overlapping products and redundancies created by the merger, Pachter believes some franchises will benefit, while others will invariably follow a more spaced-out release schedule. While Take-Two titles such as Civilization, BioShock, Max Payne, Bully, Manhunt, and Red Dead Revolver will see a bump from the superior marketing and distribution capabilities of EA, titles such as Burnout, Need for Speed, and Midnight Club would necessitate "a more leisurely release of all three franchises."

Pachter also once again addressed the possibility of change-of-control clauses in top developers' contracts. "We found it interesting that EA's offer was not predicated on successfully retaining the Rockstar North studio personnel, nor upon renewing the contracts of Rockstar's founders, Sam and Dan Houser. We believe that this negotiation will necessarily fall outside the terms of the acquisition, as it will likely entail either a significant increase in the compensation paid to the Housers and to Rockstar North, or will entail a separation agreement."

Echoing the sentiments of other analysts, Pachter reiterates that EA is unlikely to tarry in its buyout bid. "We envision this deal playing out over the next few weeks. Although we think that Take-Two management will posture and seek to delay a deal, we think that EA management will make a 'take it or leave it' offer, and expect EA to lose patience in a month or so. Ultimately, we think that Take-Two shareholders will embrace a deal, as virtually all of them will profit immensely and immediately."

As of the end of trading hours on Monday, Electronic Arts was trading down on the New York Stock Exchange by 5.2 percent to $47.14. Take-Two stockholders, on the other hand, have cause to rejoice, as the publisher's stock has spiked an astounding 54.9 percent to close out the day at $26.89.

234 Comments

  • scrymonster

    Posted Mar 1, 2008 8:52 pm PT

    Respect to Take-Two for turning down EA's big.

    EA's just been a corporate monster gobbling up their competition and destroying the video-game market with their stiffled mediocre products. Do they really think that aquiring other companies will their their junk better? Maybe they need to worry more about their own staff insead of always looking at the greener grass on all sides but theirs.

  • viberooni

    Posted Mar 1, 2008 8:42 am PT

    I'm no expert in the stock market, but if Take-Two is sitting at above $26 a share right now thanks to the offer, and EA's offer was $26 a share, and GTA is being released right around the corner.. wasn't turning down the offer the best possible move for Take-Two's shareholders in the end?


    I don't doubt that EA's muscle would make Take-Two profitable. But the timing is just so wrong, and there's other big fish out there (Microsoft, Sony, Ubisoft, Activison) that probably wouldn't mind making offers as well (if they haven't already). This hostile takeover threat is just a way to keep Take-Two from choosing who their overlords will eventually be, before they have leverage from GTA's sales figures, while eliminating their sports franchises for good measure. Also, Bioshock on cell phones!

  • popping4it

    Posted Mar 1, 2008 12:34 am PT

    simple solution dont buy **** ass EA games ugh...

  • Avenger1324

    Posted Feb 28, 2008 6:46 am PT

    One reason Take-Two wouldn't want to accept the offer is because most, if not all of 2K Sports, will lose their jobs - after all there is no need for EA to make 2 versions of each sports game. All the 2K series sports games will disappear, along with the need for those employees.

  • mjswooosh

    Posted Feb 28, 2008 1:12 am PT

    One final note: I have personally worked at Intel & Microsoft in various capacities, and I can tell you from personal experience that the corporate culture at MS is very, very cool...very fun and full of generous, talented people who are encouraged to care about what they do, not just about profit. I felt like I was playing much of the time I was at work and the mood in our offices and in general all over the campus was just simply fun...we had nerf gun fights all the time and you would always hear people laughing and joking as they were working. It was a lot of fun to work at MS and I may work there again someday after grad school. As for Intel, well, all I can say is it was night and day. Not fun at all, very "suit" driven (instead of "geek" driven like at MS), and just a complete CHORE and a GRIND to get through each day. High pressure, high stress, in constant fear of how you are being compared to your neighbor in terms of performance and, in general, boring. From what I know of associates who have worked there, EA is a lot more like Intel than Microsoft. So, you can be "angry" at MS all you want...but the REALITY is that MS is a great place to work. You may not agree with their business practices (hell, I don't agree with everything they do either)...but at least they have some regard for their customers, treat their employees VERY well, and in general have a corporate focus on more than just profit (despite what everyone thinks). Just my $.02 from someone who has actually worked there.

  • liddoriceboi

    Posted Feb 28, 2008 1:06 am PT

    Astex, next time we ask for your opinion, we'll talk to your parents first. Next thing we need are PS3 sacriders. Failboat.

  • mjswooosh

    Posted Feb 28, 2008 1:05 am PT

    Gwarpup, you must be living in an alternate dimension. The corporate culture at EA has basically been a white collar sweat shop for quite some time. This is *common* knowledge in the industry. Google the class action lawsuit that is being taken against EA by current and former employees. This is only part of the story. In general, the way EA does business in terms of acquisitions/mergers, treats their employees, and regards their competitors and customers/consumers is nothing anyone should envy and is simply immoral and entirely profit based. As a company they are certainly in the bottom half of any large corporations in terms of corporate culture or being a good "citizen" in the community. Along with other such moral luminaries as Wal-Mart they are the poster child for what is wrong with corporate America.

  • Razzi65

    Posted Feb 27, 2008 10:23 pm PT

    i think take two people wil earn EA's bid only in few month of gta release..

  • maverick_76

    Posted Feb 27, 2008 1:57 pm PT

    People don't realize that the reason the stocks shot up so much was mainly because of the impending buyout. If this deal falls through, watch how fast that stock will fall. Take Two will be looking at share prices ending up lower than before the proposed buyout going public. It's just an artificial rise, this always happens because people are trying to cash in on the buyout. Lets say you bought 100 shares of stock for $19, that $26 a share buyout will net you $700 for doing nothing. Now imagine these large stock brokers buying thousands of shares, comes to a nice little profit, if you bought when the price was still under $20. But if this deal does not go through, people are gonna cut and run, dumping the stocks to hopefully recoup any losses.

  • mr_killer_man

    Posted Feb 27, 2008 11:16 am PT

    EA needs to start making better racing games. Prostreet sucked and what happened to the team racing thing? They just dropped it. Could've put it in Prostreet somewhere or had the cops on it.

  • Sn0wOn420

    Posted Feb 27, 2008 6:26 am PT

    astex shut your mouth , ps3 is not getting any exclusive content because its SUCKS

  • mackin25

    Posted Feb 27, 2008 2:37 am PT

    ea making a move for take-two is wrong on so many levels. the only reasons they are doing this is because a) gta will be such a massive hit when released that the pay off will be massive!! and b) they take out yet another games competitor. yes i know that ea is comprised of smaller games creators (criterion) but when ea offer their input everything definatly goes to hell. they really should stick to publishing games not making them!

    take two should stick to their guns and tell them to beat it back to the hell from where they came where only the daft buy their "games"!! (if they can call them that). i do have some concerns if take two do cave in to pressure, what will happen to xbox exclusive episodes of gtaIV?? (in your face PS3!! ha)

  • wars45

    Posted Feb 27, 2008 2:20 am PT

    they can buy gta but they need to leave it to the makers of gta and not get involed with makeing the game or if they do it wiil be crap

  • RoyaleWivCheese

    Posted Feb 27, 2008 1:44 am PT

    "my fear is the GTA team will walk after this deal goes through and after IV has been released. "

    That wouldn't surprise me at all. If it does happen it will be the end of GTA as we know it. Look what happended to Rare after Nintendo sold their stake to Microsoft. Half the company left to start Free Radical.

    Then again, if they stay GTA will be ruined anyway. An EA GTA will not be a game I'll be buying.

  • raverrozza

    Posted Feb 27, 2008 1:14 am PT

    my fear is the GTA team will walk after this deal goes through and after IV has been released. rockstar HATE EA and I can see many of the team leaving to do new projects or going to new studios. that will mean the next GTA will be utter rubbish. imagine GTA radio having "DJ Atomica" from burnout on the radio instead of lazlow!! I think that would make me go on a killing spree!

  • azrael2514

    Posted Feb 26, 2008 11:44 pm PT

    EA just needs to go away and leave us gamers with only the good games. I don't need any of their crap.

  • beatman

    Posted Feb 26, 2008 10:14 pm PT

    "The only reason EA are so big is due to all there sport franchises, especialy when they make a new fifa every year & also fifa world cups ect. Which all include the same teams but just different tournaments."

    Please forgive the grammar lesson, but although EA is comprised of many individuals it is still a SINGLE company and is to be referred to as a company. "EA are so big" is an unacceptable use grammar and needs to modified to read... EA is so big due to THEIR sports franchises... Furthermore, there is a spell check integrated in the "Add a Comment" box... Use It! Whether your statement regarding EA's success is legitimate is another debate all together!!! :-)

  • thesaxmaniac

    Posted Feb 26, 2008 10:13 pm PT

    WOW 54.9 percent??? That 2 billion doesn't seem like that great of an offer anymore...

  • total_hazzard

    Posted Feb 26, 2008 8:38 pm PT

    The only reason EA are so big is due to all there sport franchises, especialy when they make a new fifa every year & also fifa world cups ect. Which all include the same teams but just different tournaments.

    This is the same with madden, every year there's a new 1 with a few changes yet ppl will still buy it. EA will keep on doing this aslong as ppl keep on buying there games.

    Don't forget when EA buy out these companies they only buy the IP's & not the staff.

  • Sly_Hippo

    Posted Feb 26, 2008 3:59 pm PT

    I hope EA doesn't buy TTWO, i mean EA doesn't exactly have any innovative ideas recently and as much as EA games do sell, alot of it is down to the releasing similar games over and over. Madden, Fifa, etc. They've basically stopped NFL games being made by 2K games. even though NFL 2k6 was far better than madden in all ways, madden sold better. Quality doesn't always win and in some cases where EA buys the rights and makes it too hard for 2K to make a game, the better man loses.
    EA is making the same games to a certain quality over and over again and comsumers keep buying it not because of how great it is but they're just too used to it.
    If games like GTA or Bioshock stay to the same standard I'll have no complaints but I haven't seen many developers thrive in the EA environment.

  • kaziechameleon

    Posted Feb 26, 2008 3:50 pm PT

    hey i'm not ignorant i know that stuff like this is how the gaming industry has gotten by, but let me tell you i don't have to like it. EA thinks at the margin, valve strives for quality and innovation, look what they did, they make fantastic games and run the largest digital distribution service in the world and maintain one of the smallest development houses, full of individuals with pure talent and love of games. valve started off creating unique and original ideas, half-life- orange box, portal and tf2, no other games out there played like any of there titles when they debuted. valve understands the audience. how to make money and how to maintain themselves. if you make great games money will follow. EA doesn't understand that instead the flood the market with crap, only a fist full of there games are worth owning, think about it EA if every game you made was a classic like valve or blizzard, wouldn't that save you the money from every iterive title you release. like the annual NFS games. if you made one every two to three years and the were actually worth buying and more than trendy tarts bought them and they kept selling for the next ten years like star craft wouldn't that be good for buissness. saturating a market with titles is insurance they say but in the end they just push out so many games before there time.

  • hannify

    Posted Feb 26, 2008 2:50 pm PT

    If Take-two could remain as its own entity i.e. EA just funds them and EA gets the profits etc then I think it is a worth off deal but we all know when EA takes over.

    Same thing with activision and blizzard really

  • irdreyes

    Posted Feb 26, 2008 2:43 pm PT

    all i know is i made an extra $200 dollars in the stock market yesterday thanks to TTWO.

  • bob1344

    Posted Feb 26, 2008 2:39 pm PT

    You guys should look up more history of videogames before thinking you are the first to react like this in the name of...artistic integrity, or thinking you are the Elites of the industry out to defend it against the corporate Monsters that are EA and co

    perfectly said Montrealien

  • jdukes247

    Posted Feb 26, 2008 2:38 pm PT

    if the take over happens i think we all will suffer, we don't need the "wal-mart "of game publishers and we all know it. anyway competition drives innovation

  • bob1344

    Posted Feb 26, 2008 2:33 pm PT

    If everybody thinks EA is so bad why does everybody buy there games. If they were to ruin future GTA people wouldn't buy them plain as that. obviously they are not making games that suck because people are buying them. they have all this money because people like their games.

  • frankfurter209

    Posted Feb 26, 2008 2:32 pm PT

    Max Payne 3.

  • bob1344

    Posted Feb 26, 2008 2:24 pm PT

    Wont the same Consumers Choice preside with all of the EA's games then to. how would EA get so big if they didn't have a Consumer backing already. There will be advantages and disadvantages but either way that is a way of life

  • jsrock_on54

    Posted Feb 26, 2008 2:21 pm PT

    instead of buying everyone out, they should make their games that are supposed to compete with the companies they take over NOT SUCK. Like how they got most of the exlusive rights for the pro & college sports. if they made madden stop sucking, people would just buy it cuz it was better.

  • Gwarpup

    Posted Feb 26, 2008 2:21 pm PT

    EA has been around forever, since PCs first started making games. Now they are more of a publisher by far. What they publish has nothing to do with the development houses. I don't know why people would think they ruin games. Their products are mostly always complete and polished unlike some terrible publishers out there. They dont put huge restrictions and timelines on companies like Activision, Vivendi, and others. Its pretty cool working under them I've read from developers. Like Bioware for instance, and Crytek. Microsoft I have much more anger toward in their schemes to promote their Console, and also Vista, they've hurt PC gaming considerably. Hopefully now they will layoff the developers in making multiplatform as they see fit.

  • okassar

    Posted Feb 26, 2008 2:18 pm PT

    Exactly what I expected.First they offer cheap,then they get really high to make sure that the offer isn't fully rejected.EA has a big chance of winning them over.That won't change our games,EA would just be able to market better but the same types of games would come along.You shouldn't worry whatever happens.

  • peeweeshift

    Posted Feb 26, 2008 2:12 pm PT

    I hope this doesnt happen.
    If this does happen we will see a big market control by EA as they try taking more major companies. they Already have some of the best. Do we really want them to have control of release dates. we might have midnight club 4 postponed so they can have nfs at one period of time. IT will be total BS

  • bob1344

    Posted Feb 26, 2008 2:07 pm PT

    but you are still supporting a company that is also said to someday possibly become a monopoly so you oppose it but buy stuff at it the same time wow that strikes me as funny but that might just be me

  • VolcanoMan001

    Posted Feb 26, 2008 2:05 pm PT

    Sure, I buy things at Wal-mart, but I don't buy EVERYTHING at Wal-mart; I shop around at many different places. That is precisely the point. I am not going to pointlessly argue with you. Walmart isn't exactly outright buying out the competition are they? They don't need to. They may very well be be driving others out (especially small businesses) because of CONSUMER CHOICE to shop there and save money, instead of shopping somewhere else, but that is totally different. This is NOT the case with EA or they would not need to buy out the competition because we would all be rushing out to buy their *quality* games, thus putting the competition out of business. See the difference? No, I do not suspect that you do.

  • bob1344

    Posted Feb 26, 2008 2:04 pm PT

    I am just saying you don't freak out about it. Do you buy things at Wal Mart it is the same thing

  • VolcanoMan001

    Posted Feb 26, 2008 2:00 pm PT

    @bob1344,

    Sure, and when we all end up in a world of wearing white jump suits and we all have numbers instead of names, a suction tube attached to our wallets, and are force fed luke warm entertainment with the sole intention of keeping the populace barely contented to the point that we don't blow our brains out... then life will still go on won't it? Does that mean it is a "good" life? (rhetorical)

  • bob1344

    Posted Feb 26, 2008 1:55 pm PT

    A take over is going to happen no matter what anybody here says it is the truth so accept it. Not everybody thinks EA creates horrible games just look at madden, ncaa football, and so many more. This is the real world where it is very hostile. Who are any of you to say EA is only in it for the money? I don't think any of you know anything along that sort of lines. I am sure money does have a part to do with it but it is not the only thing. This will not be the end of the gaming industry. Life will go on. The combining of the two might bring upon new ideas for games and improvements of other games. I am looking forward to how everything unfolds one way or the other.

  • VolcanoMan001

    Posted Feb 26, 2008 1:49 pm PT

    Is this the same analyst that said TTWO stock was a SELL to all of his investors, then changed it to HOLD after the stock went up 50% yesterday and causes untold clients to lose money? YES it is!

  • ctg867

    Posted Feb 26, 2008 1:49 pm PT

    I think they way undervalued them, and you'll see that after GTA IV ships. Honestly, that's the only one game in existence that could of singly handedly shifted the PS3 into first place if it was still Sony exclusive. No other game could hold that much weight in gaming. Not Madden, and not Halo. Those two are huge, but GTA IV is the biggest.

    I hope Take-Two doesn't do it. Otherwise sports games will all start to suck with the lack of competition, and games each studios racing and shooting franchises will be competing with each other for sales. It just wont work.

  • Raid3r

    Posted Feb 26, 2008 1:45 pm PT

    Yes, monopolies are illegal!?!?!?! "Goldman Sachs analyst Mark Wienkes said that despite popular belief that EA will soon enact a hostile takeover of Take-Two by buying up a majority of outstanding stocks, the publisher will at least raise its bid once more."

    ^^^^^^ This is how and why its illegal!!!

  • happy321

    Posted Feb 26, 2008 1:29 pm PT

    god i hope take two refuses.. no matter what.

  • imrlybord7

    Posted Feb 26, 2008 12:52 pm PT

    I really hope EA fails to obtain Take-Two. They own too many other companies as it is, and in the game industry, monopolies lead to more crappy, thrown-together games being put out in hopes of a quick buck.

  • JayJog

    Posted Feb 26, 2008 12:50 pm PT

    as long as EA dont plaster their name all over the cover and have imput to how the future games are made , iam not bortherd , but this may not be the case.

  • edgrmcmunchkin

    Posted Feb 26, 2008 12:36 pm PT

    I know, if EA buys Take 2, it wont make a huge difference to GTA4. But seeing the EA logo on the cover of what is to be perhaps the best game of all time, would ruin it.

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