EA extends, lowers Take-Two offer

Yesterday brought two key developments in the ongoing Electronic Arts/Take-Two Interactive takeover saga. The morning began with the Federal Trade Commission's announcement that it was launching an investigation to see if an EA buyout of the Grand Theft Auto IV publisher would violate anticompetitive legislation. The evening ended with a Take-Two stockholder meeting in which chairman Strauss Zelnick underlined the company board's repeated declarations that EA's $2 billion buyout offer is "the wrong price at the wrong time."

Today's news cycle began with yet more developments in the would-be megamerger. EA announced that its takeover offer, which was set to expire at 11:59 p.m. this evening, was being extended to May 16. The new date falls more than two weeks after April 30, which is one day after Grand Theft Auto IV's worldwide launch and the day Take-Two said it would begin entertaining acquisition suitors. However, Owen Mahoney, Electronic Arts' senior vice president of business development, told the Reuters news service that the actual reason for the delay was the FTC's investigation--an investigation that analysts believe is much ado about nothing.

"We assign a relatively low probability to a deal getting blocked on anti-competitive grounds, with overlap in the sports genre likely drawing the additional scrutiny," UBS' Ben Schachter said in a note to investors. "Worst case, a combined company would be forced to divest certain assets/franchises, but we see even that as unlikely. ... Given limited info, it's difficult to say how any regulatory conditions would impact valuation, but clearly synergies around Sports are a key component of the deal."

In addition to delaying its takeover deadline, EA also lowered its bid from $26 to $25.74 per share--a price Mahoney declared to still be "full and fair." The lowering came as a result of the approval of a "poison pill" measure which would dilute Take-Two's stock in the event of a takeover. Under the terms of the measure, an additional 780,000 shares would vest and be granted to Zelnick, CEO Ben Feder, and executive vice president Karl Slatoff if a purchase took place.

But while the lowering did not affect the worth of EA's overall bid, Take-Two still issued another uncowed communique after the move was taken. "Take-Two's board of directors has maintained from the beginning, and continues to believe, that Electronic Arts' proposal undervalues our company," said Zelnick in a statement. "[EA] undervalued the company at $26 per share, and it certainly undervalues Take-Two at $25.74." Take-Two went on to point out that EA has so far acquired only 6,432,787--just 8.3 percent--of the company's outstanding shares.

Although EA believes its new price is fair, analysts think the company will have to sweeten the pot to woo enough Take-Two shareholders for a takeover. "We continue to believe EA wants to buy Take-Two but will likely have to raise their tender to $30 per share if they expect to close the deal," said Janco Partners' Mike Hickey, who isn't positive that the massive publisher will follow through. "It's difficult for us to determine EA's willingness to increase their bid to complete the acquisition, but the accretive nature of the deal seems obvious and the incremental cost of a higher bid seems minimal compared to the longer-term benefits."