Electronic Arts ends merger talks with Take Two

U.S. video game giant Electronic Arts Inc (ERTS.O: Quote, Profile, Research, Stock Buzz) has pulled away from an offer to buy rival Take Two Interactive Software Inc (TTWO.O: Quote, Profile, Research, Stock Buzz) after pursuing the "Grand Theft Auto" game publisher for more than six months.

On Sunday, EA said it ended private negotiations with Take Two about a potential transaction and had decided to no longer pursue an acquisition.

EA and Take Two entered these private talks last month after EA dropped its hostile bid, worth roughly $2 billion, which the "GTA" publisher had rejected as inadequate.

Take Two lost its luster partly because of EA's own strengthening position in the video games market, which reduced the potential value of any transaction, EA's senior vice president for corporate development Owen Mahoney said on Sunday.

"We were very convinced the value of the transaction would decline over time and have come to feel more and more strongly about our own business," Mahoney said in an interview.

EA, which publishes hit titles like "Madden NFL," has said it expects new games such as the long-awaited "Spore," the evolution-inspired game, to drive sales in the 2009 financial year, even as it narrowed its quarterly loss and doubled revenue in July under a turnaround strategy.

EA's insistence that its $25.74-a-share offer for Take Two was adequate was a likely sticking point during the talks.

"It's rather straightforward," said Take Two Chief Executive Strauss Zelnick in an interview, when asked about why the talks fell apart.

"EA has been consistent in their approach regarding value and our shareholders have repeatedly rejected the price they offered. There's very little else more that meets the eye."

Zelnick also said the value of Take Two has increased significantly since EA made its offer, given the whopping sales of "GTA 4," the game's latest iteration, and quarterly results that beat Wall Street expectations.

EA made its unsolicited, $26-a-share offer for Take Two public in February and later reduced the per-share price to $25.74 and launched a tender offer, which it extended five times.

EA let its tender offer expire on August 18, but shortly thereafter, the two companies announced they had signed a confidentiality agreement and were in private negotiations about a potential deal.

A management presentation by Take Two to EA, in which executives outlined their three-year product plans, was part of the private talks, along with due diligence of the company's books.

Take Two said on Sunday it remains engaged in discussions with other parties as it seeks strategic alternatives to bring value to shareholders.

Zelnick did not disclose who these parties are, or even their level of interest in Take Two, but said his company was on a strong growth track independently.

Take Two shares closed Friday's session up 1.1 percent at $21.89 on the Nasdaq, while EA shares closed down 1.25 percent, at $44.99.

There's no doubt Grand Theft Auto 4 will be among the highest selling games (if not the highest selling game) of the year. But according to a report by CNN Money (via Kotaku), it still isn't meeting Take-Two's astronomical expectations, which may complicate the company's ongoing merger talks with Electronic Arts.

NPD numbers for the month of August were released earlier this week, and among other things, they showed that GTA4 was the 46th best selling game of the month. This is down one spot from 45 in July, and the quickly cooling sales have reportedly brought concerns that the title may not meet sales expectations after all. And with Take-Two rebuffing EA's aggressive merger offers earlier this year -- mostly on the belief that GTA4's tremendous sales would prove EA's original offer of $25.74 a share wasn't sufficient -- the sagging numbers may complicate Take-Two's efforts to seek a more lucrative deal.

There is one odd discrepancy in CNN's report, however -- they state one of the concerns for Take-Two is that GTA4 has only sold (yeah, only sold) 8.5 million units to date. However, as part of their quarterly earnings report earlier this month, Take-Two proudly announced the game has sold 10 million units. "Sales of Rockstar Games' blockbuster Grand Theft Auto 4 continued to exceed the Company's expectations. Over 10 million units have been sold through to consumers as of August 16, 2008," their report stated. Clearly, someone's figures are a little off.

Either way, Take-Two remains confident in GTA4's sales, with a representative telling CNN that "as a must-have game, we expect GTA4 sales to continue at an energetic pace." With talks between EA and Take-Two going behind closed doors last month, though, we probably won't know how accurate this report is until whenever the two companies decide to resurface.

Over the weekend, publisher Electronic Arts announced that it was ending its attempted merger with Take-Two. With Take-Two's stock diving by roughly 25 percent, the financial world is buzzing with the news that Take-Two may be in some trouble after the closed-door negotiations collapsed.

Chris Morris of Forbes points out that in a five-month timespan, 2004's Grand Theft Auto: San Andreas actually outsold this year's blockbuster Grand Theft Auto 4 by a margin of 5.5 million to 4.8 million. A margin of less than one million copies may sound insignificant, but the greatly increased production costs involved in GTA4 mean that its premature sales slowdown isn't good news for Take-Two's profits.

Analyst Michael Pachter has another number to add to Take-Two's headaches: the Houser brothers have five months left on their contracts. As relayed by GamesIndustry, Sam and Dan Houser, producers of the GTA series, can expect to command more pay in their new contracts in February 2009. According to Pachter, Take-Two faces two options, both bad: the brothers either take a high bid from a competing publisher, leaving the GTA series without its rockstar auteurs, or they stay with the publisher but cost more money, eating into the company's profits.

If it seems odd to a gamer that news about a publisher centers on one game, it's deeply unsettling to investors. "What worries me is [Electronic Arts] saw everything [Take-Two] has in the pipeline and weren't impressed enough to make an upgraded offer," wrote Morris on a Shacknews comment predicting the stock plunge.

Take-Two Interactive stock opened this morning's trading at $15.80, down more than $6 from its previous closing for a tumble of nearly 28 percent. The drop was the result of Electronic Arts announcing on Sunday that it was walking away from discussions to acquire the Grand Theft Auto publisher, and would not be making another offer.

Back in February, before Electronic Arts went public with its acquisition attempt, Take-Two Interactive stock was trading at $17.36. EA's original $2 billion offer worked out to about $26 per share, and the stock immediately soared to match that price. In the weeks surrounding the launch of Grand Theft Auto IV, Take-Two stock was actually trading higher than the offer, peaking just shy of $28.

While Take-Two stock has lost all those gains and then some, news out of the publisher since the original offer was made has been generally positive. In addition to the successful launch of GTAIV, Take-Two has posted a pair of glowing quarterly reports, the latest issued earlier this month.