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EA Should Try to Buy Take-Two Again

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Take-Two Interactive (NASDAQ: TTWO  ) is now just two months away from unleashing Grand Theft Auto V on hungry die-hard gamers.

It's going to be huge. The game play video released just two weeks ago has already been viewed nearly 18 million times. Video game sales have been slumping for four years, but watching Activision Blizzard (NASDAQ: ATVI  ) set new sales records with every Call of Duty installment proves that there is still healthy interest in marquee releases.

Even in the circus that the industry has become, Grand Theft Auto V is definitely a tent pole. It's been five years since Grand Theft Auto IV was released, and it went on to set initial sales records.

Does anyone else remember what happened two months before Grand Theft Auto IV was released? Well, Electronic Arts (NASDAQ: EA  ) made a failed attempt to acquire the smaller publisher.

EA's offer to pay $26 a share in cash for Take-Two was shot down by the company's board, followed by Take-Two shareholders nixing the proposal. Eyeing Take-Two's stock today in the high teens, the initial reaction may be that EA dodged a bullet.

It didn't, and it's why EA may want to consider making another play for Take-Two.

Take two on Take-Two
It's easy to argue that Take-Two is kicking itself for passing on EA's offer. The stock closed out last week 36% below EA's original $26 offer. However, let's take the offer off the table. Take-Two closed at $17.36 the day before the country's second-largest video game developer went public with its plans to gobble it up. We're really looking at just a 4% decline in that time.

Yes, a 4% slide in a little more than five years is pathetic. The mother of all tech rallies has taken place since then. Activision Blizzard -- the country's largest video game company -- has seen its stock climb 21% higher in that time.

However, here's the real kicker: EA shares have fallen 51% in that time!

It would be fair to say that EA wouldn't have fallen so hard if it had succeeded in acquiring Take-Two. We probably wouldn't have been waiting five years before full Grand Theft Auto installments.

EA would have probably milked sleeper Take-Two hits including BioShock and Red Dead Redemption into being even bigger successes.

Are you still sure that Take-Two is the one smarting these days?

It's not. The year that Grand Theft Auto IV came out, Take-Two went on to record an adjusted profit of $2.08 a share on $1.6 billion in revenue. This year, analysts see a profit of $2.34 a share on $1.9 billion in revenue. EA generated $4.1 billion in adjusted revenue the year the game came out. This year -- despite some pretty expensive casual and social gaming acquisitions to pad organic growth over the years -- Wall Street sees just $4 billion in revenue.

It should also be pointed out that analysts expect EA to earn just $1.20 a share this year. In other words, it can pay a huge premium for Take-Two and it would still be accretive to EA's bottom line.

The caveat here, of course, is that Take-Two's results have always been lumpy. They peak during Grand Theft Auto releases. The same pros that see record results at Take-Two this fiscal year are targeting just $1.08 a share in earnings and $1.4 billion in revenue next year.

However, wasn't the point of EA trying to buy Take-Two ahead of the last major Grand Theft Auto installment that it could put its larger development resources to work at putting out more timely releases? Wouldn't buying Take-Two make EA larger than Activision Blizzard?

It won't happen. The EA CEO who oversaw the failed acquisition resigned earlier this year. It would have to take a new commitment to make it happen.

However, the combination makes more sense now than it did five years ago for both companies.

EA needs the growth, as analysts are only targeting top-line growth in the mid-single digits over the next two years. The last thing it would want is for Activision Blizzard -- another company that could be even hungrier for growth with a projected top-line decline this year as World of Warcraft players move on -- make a move on its former flame. Take-Two could also use an exit strategy, lest we have to wait another five years for Grand Theft Auto VI.

Again, it won't happen -- but it should. 

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  • Report this Comment On July 23, 2013, at 8:22 PM, TelsaRowe wrote:

    It would be great for the two companies to merge as well as great for gamers imho. But im not so sure ttwo would let it happen. With the wild ios success and potential for Grand Theft Auto 5 Online to be the new World of Warcraft type franchise I dont know if ttwo's board would go for it.

    In the next console generation digital downloads will grow substantially (which increase profit margins considerably) and development costs will be reduced because of the ps4/xbone architecture. Along with that new markets in mobile could blow wide open for ttwo.

    I would not expect ttwo to accept any offer below $30 a share which I do not see EA, ATVI or MSFT coming even close to offering.

  • Report this Comment On July 24, 2013, at 11:59 AM, iloverockstar wrote:

    Rick, you say "We probably wouldn't have been waiting five years before full Grand Theft Auto installments," like that would be a good thing.

    EA pushing Rockstar Games to crank out more GTA than they want to would be a disaster. It would probably prompt the departure of the top creatives who are the same people who have been guiding the series for over a decade. Fans would revolt.

    Take-Two's strategy may have been to let Sam Houser do whatever the hell he wants. Maybe the results are uneven if you insist on breaking them down into 12-month periods, as though nothing should take longer than that to create.

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