Game Firm Interplay Discussing a Buyout

Amid a rapid industry consolidation, software game maker Interplay Entertainment Corp. said Tuesday that it is in talks with a suitor about the possible purchase of the company.

Interplay, a money-losing company that got a shot in the arm early this month with a $5-million loan from Microsoft Corp., would not identify the potential buyer and cautioned that a deal is not certain.

The talks come at a time Wall Street is rewarding companies that are building enough bulk to survive in the fiercely competitive video game market and punishing those that appear too weak.

At the same time, heavyweights such as Warner Bros., Walt Disney Co. and Sony Corp. are pushing for personal computer and video game products.

In the last year, as industry sales softened, some independent companies have shopped themselves to find shelter in larger, better capitalized firms. Toy maker Hasbro Inc. sold its money-losing Hasbro Interactive and Games.com units last year to French game publisher Infogrames Entertainment for $100 million in cash and stock.

Video game publishing executives said Interplay has been attempting to woo prospective buyers for a month. Analysts said it may have attracted its suitor as it showed off its new titles at the recent Electronic Entertainment Expo in Los Angeles.

Analysts said the Irvine firm, which has produced such popular computer games as “Baldur’s Gate,” “Fallout Tactics” and “Icewind Dale,” may have too little cash on hand and too much debt to remain independent.

Microsoft helped boost the smaller company’s profile this month when it agreed to lend money so Interplay could add exclusive features to a game based on the movie “The Matrix” for Microsoft’s new Xbox game console. The agreement allows online play only through the Xbox.

But Interplay’s dwindling resources could hamper its ability to deliver the product. Console games typically require 18 months and $5 million to $10 million to develop. As of March 31, Interplay had $7.6 million in cash and $63.6 million in debt.

Interplay also had been occasionally slow to capitalize on opportunities, analysts said.

“They essentially were content with being leaders in PC software development and missed the first wave of the console market, which includes PlayStation,” said Patrick Winton, an analyst with Roth Capital Partners in Irvine.

With a host of new products coming to the market this holiday season, Interplay is getting a “second chance” to capitalize on the console market trend, Winton said.

“We expect the second half of the year to see the company make great strides,” he said. Roth Capital helped Interplay raise $12.7 million in April to restructure debt and continue funding operations.

Once a bigger force in computer gaming, Interplay may end up helping another company round out its offerings, analysts say. An acquisition would benefit Interplay as well, said Michael Wallace, an analyst with UBS Warburg.

“They are much better if they get bought,” he said. “They’ve been low on cash. They’ve lost a lot of money. If they get bought by a bigger partner, they’d be better off in the long run.”

The company said the purchase price probably would reflect a “modest premium” over the average price of its stock for the latest 20-day period, which has been about $2.45 a share this month. At that average, the likely purchase price would be more than $94 million.

Though Interplay has been losing money almost since it went public in 1998, including $7.7 million in the first three months of this year, analysts say the company’s assets make it attractive. In addition to its video games and its leading position in the role-playing game niche, Interplay owns majority interests in four development studios--Black Isle Studios, Digital Mayhem, 14 Degrees East and Shiny Entertainment.

Interplay’s stock fell 15 cents on Tuesday to close at $2.96 on Nasdaq.

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Times staff writer Alex Pham contributed to this report