Midway shares return to earth following run-up

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The way Sumner Redstone was snapping up shares of Midway Games -- the modern video game company whose roots are in arcade classics like "Space Invaders" -- a few years ago, some said it was no wonder investors followed suit.

After all, the chairman and controlling shareholder of Viacom Inc. and CBS Corp. presumably was in a pretty good position to know if Midway's business was headed in the right direction given he had friends close to the action.Redstone was buying shares from the low-single digits up into the high teens and in May 2004 reached a majority stake in the gamemaker. The entertainment industry veteran's support pushed Midway to new highs, and investors looked for a rosy future.

But the stock has since tumbled to $5.90 as of Monday, and the company has in recent weeks seen investor lawsuits seeking class-action status.

They allege that Midway and certain of its officers in 2005 and 2006 made financial misrepresentations and didn't immediately disclose operating challenges, which inflated the company's stock price. They also, in part, charge that Midway CEO David Zucker and others sold shares as Redstone was buying and they knew the financial outlook was not too rosy.

With layoffs and restructuring charges looming, management should have lowered guidance before selling shares, the suits maintain.

No wonder that Midway today is a stock that divides Wall Street, some of whom see upside in it, while others warn investors to stay clear, especially in light of its recent decision to delay two big titles until next year -- "Blacksite: Area 51" and "Wheelman," which features actor Vin Diesel.

It appears in hindsight, some said, that Redstone's interest in Midway had a more personal edge than investors realized. Redstone was friends with a large Midway stakeholder who supported him over Barry Diller in 1993 and 1994 when both moguls were chasing Paramount Pictures, which eventually went to Redstone.

"Perhaps Redstone was showing his confidence in (the stakeholder) by buying Midway shares, just as he showed his confidence in Redstone," one observer said.

Plus, Redstone simply wanted to replace Midway shares he had given up in his divorce, observers said, though he now owns about 88% of the company after buying many more shares than his divorce had cost him.

Insiders also have said that Midway is a core issue in the strained relationship of Redstone and daughter Shari, because the elder Redstone purchased Midway shares primarily via National Amusements Inc., where Shari is president.

National stock was even used as collateral for a $425 million load that Redstone was using to purchase Midway shares for much more than they are worth today. After a few defensive financial moves, Redstone has ended up personally owning about 13.6% of the Midway stock while National owns the other 74.3%.

So, should investors buy Midway stock now?

The attention given to Redstone's stake might be clouding the fact that Midway could well be on its way to a successful turnaround, said Wedbush Morgan Securities analyst Michael Pachter, who compares it with Lionsgate Entertainment a few years ago.

"Nobody was sure about that stock," he said. "A couple of big movies later, and everybody loves them."

In contrast though, Midway has largely tanked since the initial Redstone boost. That drop might be an opportunity, some said. "They've gotten their cost structure very low and they're not taking a lot of risk," Pachter said. "They've got some licenses that have worked well, like 'Happy Feet,' and a few properties, like 'Mortal Kombat,' that work very well."

Pachter also said the shareholder complaints are nonsense. "When the executives sold, why didn't all these clowns who are now suing sell also?" he asked. "When Zucker sold, the stock didn't go from $20 to $6 in a day. It drifted. What did these people lose, about 50 cents a share?"

But others warn that the stock is speculative. "If you look at their short list of successful games, the market cap is just incredibly higher than one should expect," said one money manager partial to the video game sector.

On Monday, Midway's market capitalization was $539.2 million. The company declined comment for this report.

"An investment with Midway is an investment with Sumner Redstone, an old-school media man who obviously knows nothing about this form of media entertainment," the money manager argued.

Another analyst, Edward Williams of BMO Capital Markets, also advises investors to stay on the sidelines.

"The valuation of the stock remains high relative to the operational performance we expect for 2007," he said. "However, with an enormous ownership by its majority shareholder, we expect shares of Midway to maintain a relative premium in the marketplace."
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