Take-Two asks shareholders not to take up EA's offer

Rockstar parent believes the offer is "inadequate in multiple respects"; analyst Michael Pachter thinks publisher is making a big mistake.

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Earlier this month, Electronic Arts announced that it was taking its unsolicited offer for Take-Two Interactive direct to the shareholders in a hostile bid to gain control of the company after the board rejected its advances.

Analysts were mystified as to why Take-Two would turn down the offer from the megapublisher, which weighed in at $26 a share, or some $2 billion, especially when it would have meant a 64 percent premium for shareholders over Take-Two's share price before EA went public with its offer.

Once the offer went to the investors, Take-Two asked them to hold on to their stock until it advised what they should do with it--and today, it's asking them to not sell to EA.

Take-Two has released a statement listing 10 main reasons why it doesn't want the deal to go ahead, most of which the publisher has previously expressed. These include the its initial assertions that "EA's offer price is inadequate and substantially undervalues the company," that the EA offer is "opportunistic" and "had been timed to take advantage of the upcoming release of Grand Theft Auto IV," as well as the fact that "the EA offer does not reflect progress in the company's revitalisation efforts." As for new reasons, the company's financial advisors, Bear Stearns and Lehman Brothers, agreed with Take-Two executives that the offer price was inadequate. It was also noted that EA's offer would be taxable, and is "highly conditional."

The Take-Two shareholder advisory concluded that the offer was "contrary to the best interests of Take-Two's stockholders." Accordingly, it recommended that those with Take-Two stock not sell to EA.

The company also took further action to make a hostile takeover more difficult--following on from its taking up a severance plan for executives and other employees in the event of termination following a takeover. Today, among other things, it also changed the date and time of its annual meeting to April 17 at 6:30 p.m. (EDT), adopted a stockholder rights agreement, and established a "poison pill" clause that would allow for the creation of new shares in the company if any individual shareholder acquires 20 percent or more of the company in the next 180 days. The poison pill would also be triggered if an investor currently over that threshold acquired an extra 2 percent of the company.

In addition, the Take-Two board will be "exploring alternatives" to a takeover by EA, which might include a business combination with third parties (or even with EA itself), remaining independent, or "other strategic or financial alternatives that could deliver a higher stockholder value than the current EA offer." It said it has already received "indications of interest" from other third parties, although "no substantive discussions have yet occurred."

Take-Two's chairman of the board, Strauss Zelnick, commented, "We are effectively working toward a process to review all available options to maximize this value, either as an independent company or in combination with a third party, and are open to beginning informal discussions starting now. Our stockholders' interests would hardly be served by accepting an offer from EA at the wrong price and the wrong time."

Michael Pachter, senior analyst with Wedbush Morgan, called Take-Two's decision a mistake. He maintained his surprise at Take-Two's continued rejection of the EA offer, and expressed his doubt that it would get any better suitors.

"We think the board has virtually no chance of finding a better offer," Pachter said. "The EA offer has been public for 31 days, and we believe the company is not in discussions with any other party. This deal, in our opinion, makes more sense for EA than for any other company, primarily because of the synergies from consolidation of the two companies' sports businesses. No other company is in the position to realise those synergies, which we believe are substantial."

Instead of refusing the offer and closing negotiations, Pachter thinks Take-Two could have extracted a higher offer from EA in return for the prospect of a friendly takeover as opposed to a hostile one. He added, "We think that Take-Two's position that the company will have greater value after the release of Grand Theft Auto IV is naive at best, and disingenuous at worst... The absence of other offers in the interim suggests to us that EA values Take-Two more highly than any other interested party, and we are confounded that Take-Two's board believes that other parties will be willing to pay more than $26 after the release of the game."

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