EA Puts the Heat on Take-Two

Video game maven Electronic Arts (Nasdaq: ERTS  ) is going all hostile on Take-Two Interactive (Nasdaq: TTWO  ) . The duo has been unable to settle its differences and agree to acquisition terms on its own, so EA is taking its bid directly to Take-Two's shareholders.

EA's $26-per-share bid, soundly rejected by Take-Two's board of directors, has now become a tender offer to shareholders. The current stock owners have until April 11 to decide whether or not to take the offer. Curiously enough, and for no obvious or legally required reason, that's the day after Take-Two's scheduled annual meeting of shareholders. Perhaps EA just likes the extra drama, or wants to see a public song-and-dance before turning out the lights?

Whathever the case, Take-Two's fate now rests with a few hedge funds such as D.E. Shaw, and mutual fund managers such as Legg Mason (NYSE: LM  ) , Oppenheimer (NYSE: OPY  ) , and Barclays (NYSE: BCS  ) . Individual investors hold a vanishingly small stake in the Grand Theft Auto publisher. That's a very common situation, since financial institutions own 50% or more of all but 13 of the S&P 500 stocks. The little guy rarely gets final say-so in corporate matters like takeovers. But I digress.

The battle is not exactly taking place in the open market. If EA fails to garner a controlling stake when all is said and done, it won't actually buy any shares; the checkbook will return to its back pocket, and the share tenders will go "return to sender." Take-Two's attempt to boost the takeover price with generous stock packages to top management may make or break the deal, but it won't affect the price.

How so? Well, if the golden parachutes are still in place by the 11th, EA drops the offer to $25.74 per share to make up for the extra cost. Since the stock currently trades slightly above that price, some investors might think that the unwelcome provision might get the axe -- or, more likely, that the whole deal might fall through after all. Since the big boys who hold the cards in this game also (for the most part) control the trading action, there's some reason to believe in another rebuff -- this time from the shareholders -- and then another round of back-and-forth dealing.

Mind you, playing the arbitrage game here probably holds more risk than reward. If Take-Two is still a separate company by the time Grand Theft Auto IV hits the stores (April 29), then you might want to come back to the stock. In the meantime, Fools with a yen for video games would be better off moving their funds into EA itself, or rivals like Activision (Nasdaq: ATVI  ) or Konami (NYSE: KNM  ) . And remember, if EA wins, but at the reduced price, you could come out ahead by selling early on the open market. Crazy, but true.

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