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Take-Two Not Worth The Headache

By Glenn Curtis

Tickers in this Article: TTWO, ERTS

On Sunday afternoon news hit the wire that game developer Electronic Arts (Nasdaq:ERTS) will not be combining forces with "Grand Theft Auto" maker Take-Two Interactive (Nasdaq:TTWO). The news comes as a bit of a shock given that the two parties have been doing a mating dance for months now.

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I don't want to pile on Take-Two right now, but I do want to make clear that despite the stock's roughly 20% haircut after the news broke, I think it should be avoided.

The Inner Meaning
Electronic Arts wasn't very specific as to why it ended its pursuit. Instead, it offered the following vague explanation in the press release: "Electronic Arts Inc. today announced that while EA continues to have a high regard for Take-Two's creative teams and products, after careful consideration, including a management presentation and review of other due diligence materials provided by Take-Two Interactive Software Inc., EA has decided not to make a proposal to acquire Take-Two and has terminated discussions with Take-Two."

Folks, I don't like this comment one iota. To me it seems to imply that something that Take-Two's management did, or information it supplied didn't meet the Electronic Arts "sniff test". If EA found something it didn't like, I think many retail investors could come to a similar conclusion in the days ahead and bail.

Why Earnings Now Matter
Another thing that concerns me is that with Electronic Arts out of the picture, this will suddenly become an earnings story. What's wrong with that?

Well, nothing is wrong with the exception that earnings are expected to decelerate from $2.10 per share in 2008 (ending October) to $1.53 a share in 2009. In short, I think that this, too, could turn off hordes of retail and institutional investors. (Learn how these big players can both create and destroy shareholder value in The Pros And Cons Of Institutional Ownership.)

Timing Off
This news comes at a particularly bad time. Tax loss selling season is just around the corner. Shares are currently trading near the low end of their 52-week trading range. Very simply, because the shares are seemingly in the doldrums right now, I think that tax loss selling could be quite harsh this year. (Read Selling Losing Securities For A Tax Advantage for further details on this strategy.)

Another timing issue is that this news mutes the decent third quarter results and comments that Take-Two had offered up earlier this month. As they say, timing is everything.

Bottom Line
The shares have already retraced to around pre-acquisition-talk levels, and some may argue the selloff is a bit overdone. Bulls will also likely point to its portfolio of hit products including "Grand Theft Auto IV", and "Top Spin 3" as evidence that it is a still force to be reckoned with.

All things considered, however, I think that the news that Electronic Arts won't be pursuing Take-Two is a big negative for Take-Two's stock. Furthermore, despite the selloff on the news, I do not think the shares are worth bottom fishing.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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