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Take-Two Is No Take-Over

Posted: May 29, 2009 10:15 AM by Eugene Bukoveczky

Tickers in this Article: ATVI, THQI, ERTS, TTWO

Earlier this month it was disclosed that billionaire investor Carl Icahn had upped his stake in video game maker Take-Two Interactive Software (Nasdaq:TTWO) to over 2 million shares, about 2.6% of the company. That move reignited speculation that the company could still be a potential buyout target. Last year, rival videogame maker Electronic Arts (Nasdaq:ERTS) had made a $25.74-a-share bid for Take-Two, but discussions were terminated when the parties failed to agree on a mutually satisfactory price. (For more, see Can You Invest Like Carl Icahn?)

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Recent Sales Slump
While the conviction that Take-Two is still in play could still be motivating some investor interest in the stock, the likelihood of any sort of deal has been dimmed by the recent drop in game software sales. The sharp decline has demonstrated that the industry is nowhere near as recession resistant as many had hoped. According to research firm NPD, total U.S. video game sales fell by 17% in March, surprising many analysts who had expected a flat year-over-year comparison.

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Take-Two's recent reported quarterly loss and sharply lower guidance for the current quarter confirm that it too has been stung by the ongoing bout of consumer belt-tightening. While the fiscal second-quarter net loss of 4 cents a share was less than the expected 13 cent a share loss, this quarter's expected loss of between 55 to 65 cents a share would be much worse than the 2 cent a share loss analysts had predicted.

Controversial Game Still Key
News that release of several new game titles would be delayed, possibly due to quality issues, continues to underscore concerns that the company's profitability remains uncomfortably tied to its blockbuster, and uber-violent, "Grand Theft Auto" series, which accounted for about 46% of revenues in fiscal 2008. Conversely, rival game makers like THQ Inc. (Nasdaq:THQI) and Activision Blizzard (Nasdaq:ATVI) have tended to put their eggs in more than one basket.

While the game has been a huge money maker for the company (the latest version, released in 2008, achieved a one-day record of $310 million in worldwide sales) Grand Theft Auto, and games like it that feature killing sprees, torture and graphic sexual content, continue to be targeted by state authorities aiming to ban their sale and rental by anyone under the age of 18. California recently petitioned the U.S. Supreme Court to uphold its state law thereby allowing it to join Washington, Illinois, Michigan, Louisiana, Oklahoma and Minnesota, all of which have laws restricting the sale of violent video games. (For more, see Power Up Your Portfolio With Video Game Stocks.)

The Bottom Line
Consumers may be "cocooning", or choosing to spend their leisure time in more frugal ways, usually at home, but it's now increasingly apparent that they're choosing to replay last year's games over rushing out to buy this year's hot new titles. Until this changes it's unlikely that anybody will step up and make an offer for Take-Two. (For more information on mergers and acquisitions, read The Wacky World of M&As.)

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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