Middle players feel the squeeze
With the world’s biggest video game publishers devouring their rivals, is it game over for mid-size companies?
Analysts said Monday that Take-Two Interactive Software Inc., the New York company behind the “Grand Theft Auto” franchise, seemed to have little choice but to join industry giant Electronic Arts Inc. EA pressed Take-Two shareholders to accept its unsolicited takeover bid of $2 billion.
If successful, EA’s bid would leave seven companies together controlling more than 75% of the $11-billion U.S. market for game software, said Ben Schachter, an analyst with UBS Securities.
Take away the big game console makers -- Sony Corp., Microsoft Corp. and Nintendo Co. -- and there would be four. EA and Activision Inc., which is bulking up in a pending merger with Vivendi’s games business, would reign over THQ Inc. and UbiSoft Entertainment.
Analysts said Agoura Hills-based THQ was the next probable takeover target.
Size matters in the games industry, EA Chief Executive John Riccitiello told Wall Street analysts Monday morning when explaining why Take-Two’s investors should accept his company’s offer.
“Take-Two is a sub-scale business in an industry where global scale has become imperative,” Riccitiello said.
Some Wall Street investors and analysts believe a deal is inevitable.
“It’s going to happen,” said John Taylor, managing director of Arcadia Investment Corp., which owns shares of Take-Two and EA. “You have a willing buyer. You have a willing seller. And all you have to do is settle on a price.”
Investors are betting that the price will be higher than the $26 a share offered by EA on Feb. 19 and rejected Friday as “inadequate” by Take-Two’s board. Shares of Take-Two soared $9.53, or 55%, to $26.89 on Monday, while EA fell $2.60, or 5%, to $47.14.
EA’s offer coincided with a decision by Take-Two’s board of directors to grant 1.5 million shares to Zelnick Media, the investment company that led a boardroom coup last year to take control of Take-Two.
The firm is led by former BMG Entertainment and 20th Century Fox executive Strauss Zelnick, who now serves as Take-Two’s executive chairman.
Take Two’s board approved the stock grant just days after EA made a formal offer for the company Feb. 5, according to a Feb. 14 regulatory filing. If Take-Two’s shareholders approve the grant when they meet in April, Zelnick Media stands to gain $20 million to $39 million at the current offering price, depending on when a merger is consummated.
“The discussions about the Zelnick Media management agreement began well before the company received a formal offer from EA and was not initiated as a result of conversations with any potential acquirer,” Take-Two spokeswoman Nina Devlin said.
As the cost to develop, market and distribute a video game reaches into the tens of millions of dollars, publishers have adopted a buy-or-bust strategy. By expanding their portfolios to include more games, they hope to be able to better afford the skyrocketing expenses and absorb big commercial flops.
Take-Two has struggled to capitalize on the success of titles such as “Grand Theft Auto” and “BioShock.” The company posted revenue of $982 million and a $138-million loss during its 2007 fiscal year, ended Oct. 31.
With annual sales of more than $3.1 billion last year, Redwood City, Calif.-based Electronic Arts is the leading independent publisher. Santa Monica-based Activision is No. 2 with $1.5 billion in sales in 2007 but is set to close a merger with Vivendi’s game business this year, adding Blizzard Entertainment’s “World of Warcraft” to its lineup.
“A billion dollars in revenue is just table stakes to get into this business nowadays,” said Michael Pachter, an analyst with Wedbush Morgan Securities. “If you’re Take-Two and you get it right, you can make a few bucks a share. If you don’t, you end up losing money, which Take-Two has done for the last two years. That makes investments in this business risky at the middle level. That’s why everybody is trying to get bigger.”
Analysts and investors said that second-tier players were takeover targets. THQ shares gained $1.71, nearly 10%, to $19.65 on the speculation that it might be next.
“THQ is the most likely acquisition candidate,” said Jason Lisiak, an analyst with Manning & Napier Advisors Inc.
“I also wouldn’t rule out UbiSoft.”
THQ Chief Executive Brian Farrell declined to comment on acquisition rumors but said the consolidation showed investor excitement about the industry’s prospects.
“If EA takes over Take-Two, you’ll have two publishers vying for the top spot: Activision and EA,” he said. “Then you have us and UbiSoft. After that, it drops off pretty dramatically.”
EA owns a 17% stake in UbiSoft, which created “Assassin’s Creed,” “Rayman” and “Tom Clancy’s Splinter Cell.” Jamie Borasi, a spokeswoman for the Paris-based company, declined to comment on takeover rumors other than to say, “It’s a dynamic industry, and anything can happen.”
Even as the mid-size players feel pressure to get bigger, tiny studios are proliferating to take advantage of a new trend: smaller games that time-starved players are increasingly snapping up via their Internet-connected game consoles or while browsing the Web.
“Big publishers don’t like to take creative risks,” Pachter said. “That leaves a lot of room at the bottom for little guys.”
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