By Yi-Wyn Yen
April 17, 2008

By Yi-Wyn Yen

When it comes to this spring’s crop of hostile takeovers, none has become more strange and complicated than Electronic Arts’s attempt to buy smaller, rival game publisher Take-Two for $2 billion.

On Thursday evening, Take-Two (TTWO), which makes the popular Grand Theft Auto series, will hold its annual shareholder meeting at the W Hotel in New York City. One proposal on the table: giving management 1.5 million shares of restricted stock, which would be worth tens of millions of dollars in the event of a buyout. If ZelnickMedia, the firm that has been managing Take-Two since shareholders voted out the previous executives at the last annual meeting, wins approval of that management incentive, the value of Take-Two shares will be diluted by 26 cents, putting in jeopardy EA’s (ERTS) offer of $26 a share.

In a bizarre twist, EA says that the majority of Take-Two’s current shareholders will be excluded from the meeting. Take-Two will only allows those who held the stock prior to Feb. 19 to attend the meeting, which means even those who no longer own shares in the stock can determine the fate of those who do. Analysts estimate that between 50% to 70% of Take-Two’s stock has been sold since EA went public to buy the company in an all-cash deal on Feb. 24.

“The sell-off has created a situation where former shareholders will vote on a management compensation amendment which could significantly impact new shareholders – and the new shareholders are not eligible to vote,” an EA spokesman said in a statement. “It’s like having your last employer give you a million dollar bonus that your new boss is forced to pay.”

Whatever the outcome of the shareholder meeting, EA’s deadline for Take-Two investors to accept the deal ends on Friday at midnight eastern time. EA has no immediate plans to raise its all-cash offer, which Take-Two’s management has rejected as too low. Take-Two’s chairman, Strauss Zelnick has stated that the company will not entertain buyout offers until April 30, the day after the release of Grand Theft Auto IV, which is expected to be one of the biggest hit games this year. “The EA proposal failed to value Take-Two’s extensive portfolio of top-selling brands and our extraordinary creative and human assets,” Zelnick said on last month’s earning call.

Analysts have watched the drama unfold with earnest. “I have been covering M&As for 20 years, and this is by far the weirdest thing I’ve ever seen,” says Michael Pachter, a gaming analyst with Wedbush Morgan Securities. “The timing is odd. The way the events have proceeded has been odd. The fact that so many shareholders have bailed is odd. It’s unusual how belligerent the two managements have become. Take-Two thinks it’s worth more after Grand Theft Auto comes out. EA thinks the company is worth less before it comes out. They’re both wrong. The company is worth the same. So the thinking is a bit odd too.”

Along with a possible change in investor sentiment, EA also faces anti-trust concerns. On Thursday morning, EA received its second request from the Federal Trade Commission to file more details of its proposed deal. Both EA, with its Madden Football series, and Take-Two, with its 2K Sports franchise, offer competing sports video game titles. “Worst case, a combined co.
would be forced to divest certain assets/franchises, but we see even that as unlikely,” writes UBS analyst Ben Schachter in a report.

Though much uncertainty remains, many analysts believe an acquisition is at hand. “
The news does little to change our view that ERTS will be able to buy TTWO in the $26-$28 range,” Schachter wrote. “We still see ERTS as the best acquirer of TTWO in terms of potential synergies and the most likely to win it, w/price remaining the only issue.”

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