"Stop me if you've heard this one before," writes Forbes' Chris Morris. "A massive tech company wants to buy a sizable competitor, in hopes of dethroning an even bigger player in the industry. Only, it can't close the deal, because that sizable competitor thinks the offer price is much too low."
"At the end of the Microsoft-Yahoo negotiations, Yahoo was left battered, with employee morale low, executives jumping ship, and stockholders unhappy," writes The Industry Standard's Cyndy Aleo-Carreira. "Is that really where Take-Two wants to be?"
Is that where we are with central casting? Electronic Arts (Nasdaq: ERTS ) is starring as the market share-hungry Microsoft (Nasdaq: MSFT ) , with a young Take-Two Interactive (Nasdaq: TTWO ) filling the role of a headstrong Yahoo! (Nasdaq: YHOO ) ?
It's true. Both EA and Microsoft realize that they lack the organic muscle to become leaders in their respective industries. Take-Two and Yahoo! have rebuffed the amorous advances.
The similarities end there, though.
Quiet on the set
I can think of at least four reasons why EA-Two is no Microhoo.
- Microsoft went public with its hostile buyout when Yahoo! was vulnerable, after posting lackluster quarterly results that found operating margins tightening and year-over-year profitability falling. EA stepped up its pursuit of Take-Two just before the company's highly anticipated Grand Theft Auto IV hit stores. The hype was justified, with the game shattering industry sales records.
- Yahoo!'s fundamentals continued to degrade after Microsoft's offer, with analysts scaling back their near-term profit projections and market leader Google (Nasdaq: GOOG ) continuing to gain market share. Take-Two has revised guidance higher since EA's first kiss, with analysts following suit. Between a movie deal for the BioShock franchise, an MP3 sales deal through Amazon.com (Nasdaq: AMZN ) , and last month's best-seller appearance of its latest Civilization game, the future keeps getting brighter for Take-Two.
- Microsoft offered to pay 70 times this year's projected earnings for Yahoo!, a price that would have been dilutive to Microsoft and a premium to the industry. EA is offering to pay just 14 times this year's projected net income for Take-Two, a price that is accretive to EA's earnings and a discount to the video game industry.
- Microsoft's offer never made it out of the boardroom. Take-Two had no problem with EA taking its tender offer directly to its shareholders, who rejected it four months in a row. It wasn't even close, with EA never getting more than 15% of Take-Two's investors to sign off on the $25.74-a-share tender offer.
Boo hoo, Microhoo
Take-Two isn't Yahoo!, a company that irritated its shareholders by refusing to accept a generous offer. Take-Two is no Heelys (Nasdaq: HLYS ) , the wheeled footwear maker that is somehow skating away from a premium buyout offer despite a fad-affirming 76% revenue plunge in its most recent quarter.
Take-Two is at the top of its game. There is no reason why it should settle for less than an industry multiple. It will take Yahoo! years to approach the $31 to $33 prices that Microsoft was willing to pay. Heelys may not even be around when that happens. However, Take-Two is just a hit title away -- or perhaps just a hit quarter or two away -- from lapping EA's offer.
There is no urgency to cash out. Investors won't be dangling battering rams and pitchforks at the next Take-Two shareholder meeting, and not just because they collectively decided the company's fate this summer.
So go ahead and rip up that Microhoo script, Take-Two. You're better than that bit part. You're a star, baby. Heelys? Central casting is calling. They want you to read for the part of one Jerry Yang.
Skate away, that's all.
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