February 22nd. April 11th. May 16th. June 16th. July 18th. What do these disparate days have in common? They’re all seemingly arbitrary ‘expiration dates’ by which Take-Two or its shareholders had to either fork over the company to Electronic Arts in exchange for $25.74 per share, or risk the unthinkable — a one-month extension. CNET reporter Daniel Terdiman wrote that EA was losing its credibility after the third such elapsed expiration, one month ago today, but now we’re on take four. Why persist? What’s in it for EA other than a summary dismissal?
I just got off the phone with Wedbush Morgan Securities analyst Michael Pachter, and the answer is: a lot.
Before we got down to business, Pachter told me that I’d reached him at an opportune moment; earlier today, he himself had spoken with Electronic Arts about the very same subject. This didn’t particularly surprise me — Pachter is a well-connected individual on top of his game — and neither did his suggestion that I read an article in the New York Times before we continued the conversation. (I’m not nearly as well read as I’d like you to believe.) What did surprise me was that EA told Pachter that this article was an “excellent description of the process.”
According to Pachter, who kindly explained the text’s implications, Electronic Arts doesn’t keep extending the deadline because they think Take-Two will have a sudden change of heart; it’s because they’ve already almost everything they need to push the deal through, and are simply waiting for the last two pieces of the puzzle to fall into place.
Item #1 is FTC approval. In order to secure a deal with Take-Two, Pachter told me that EA “has to demonstrate that the combination would not be anti-competitive,” and in order to do so, “there actually needs to be a proposed combination” to begin with. EA can’t afford to stop the Take-Two offer, or else send a signal to the government that there will be no such combination, and thus no reason for the FTC to investigate and approve.
If you’re one of those gamers who cheered the recent anti-competition lawsuit against EA, you might imagine this would be a tall hurdle to jump. Pachter doesn’t agree. “In my opinion,” he told me, “the FTC is going to approve.” As far as the FTC is concerned, approval is not contingent on the availability of consumer choices, only potential price fixing — and according to the veteran games analyst, game prices have been set in stone since before Grand Theft Auto IV was even a glimmer in Sam Houser’s eye. “How many times have you ever had a triple-A Xbox 360 or PS3 title retail at anything other than $59.99? Never.”
Item #2 is removal of the “poison pill” shareholder rights agreement that Take-Two approved back in March. Originally implemented as a contingency plan that would drive up the cost of any acquisition relying on hostile bids, the poison pill would be a thorn in EA’s side… except that Take-Two’s board has the power to eliminate it. Since shareholders can vote to replace the board with those more friendly to EA’s cause, Take-Two has backed themselves into a corner. They can go willingly, perhaps try to negotiate a deal with EA over the umpteenth tender offer extension — or they can be forced out by investors looking for a quick buck or two per share. According to the NY Times article, EA has agreed not to go hostile until either the deal passes muster or 45 days after the FTC has proper paperwork in hand, whichever comes sooner. Pachter says, “if the FTC approves the deal, it’s happening. It’s done.”
I was slightly confused why Take-Two investors would willingly replace the board when Grand Theft Auto IV has done so well (after all, only 8.3 percent of shareholders have accepted EA’s tender offer thus far) but the gentleman on the other end of the line bid me look at the company’s current stock price — $26.34 — compare it against what it was the day EA submit their original offer — $26.89 — and remember that Grand Theft Auto IV released in-between. Though in all fairness Take-Two reached the fifty-two week high of $27.95 the same day they announced that the Guinness World Record-breaking title sold 8.5 million copies, the basic lesson to be learned here is that the most successful game in the world could have no impact on the popularly determined value of a company.
Both Pachter and the NY Times agree that the seemingly complacent Take-Two stockholders are simply waiting on a higher price, and Pachter thinks they’ll get it: “Everyone understands EA has to pay more… I’d say a dollar or two.” But in this Mexican standoff, nobody’s moving a finger — not EA, not Take-Two, and not investors — until the FTC renders their verdict.
Helped along by today’s Take-Two/FTC compromise, this battle may not be drawn out as long as it otherwise could have, but we’re not holding out hope — we’ll anticipate Take-Two’s expiration date will magically extend itself to August 18th, September 20th, and October 31st.
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July 1st, 2008 at 5:33 pm
[...] engaged in a worryingly similar practice. Even a newcomer to the games industry can point to the ongoing EA/Take-Two buyout attempt, but it’s merely the most prominent example of an overall trend. Activision/Vivendi is still [...]
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