Rules of the game are changing
EA takeover plan points to end of midsize publisherElectronic Arts' stunning $2 billion all-cash offer for Take-Two Interactive Software is more evidence that the game industry is moving into the mold of other entertainment businesses, with a handful of players and a focus on producing blockbuster hits.
"You can certainly call this the demise of the middle class in the video game industry," said Michael Goodman, Yankee Group's director of digital entertainment. "With what it costs to develop blockbuster titles and the risk level involved, there is no middle ground anymore."
EA's unsolicited bid sent shares of Take-Two soaring past the $26-per-share offer despite indications by Take-Two management that it intends to fight any hostile takeover attempt. The stock ended Monday trading at $26.89, up 55%.
The news also comes just two months before Take-Two will release "Grand Theft Auto IV," which is expected to be a blockbuster hit perhaps on the scale of Microsoft's "Halo 3" and Activision's "Call of Duty 4," top-selling games in 2007.
But Goodman said one great franchise simply isn't enough in today's climate. "Does Take-Two have the scale to be successful long term? Probably not," he said. "You need multiple major franchises now. As great as 'Grand Theft Auto' is as a franchise, all it takes is one bad game and you're done."
Much of the focus on EA's takeover attempt has been on "GTA" and to a lesser extent other Take-Two games with long-term franchise potential like "BioShock."
But EA's takeover of Take-Two would not only put those games in its portfolio, it would also take care of Take-Two's 2K Sports division, arguably the only decent competitor left to EA Sports — at least in sports other than NFL football.
"Take-Two has a few franchises and they're probably the biggest alternative out there to EA Sports," Goodman said. "What they don't have is a large portfolio, which is why they're a midsize publisher."
For now, Take-Two is taking a tough stand against EA's proposal, saying the $2 billion offer "substantially undervalues Take-Two's robust and enviable stable of game franchises, exceptional creative talent and strong consumer loyalty."
But one game industry veteran, who requested anonymity, predicted the deal will eventually go through, especially considering that Take-Two hasn't posted an annual profit since 2005.
"The shareholders are dictating what you do these days," he added. "And I think the shareholders are going to come in and say, 'Guys, you haven't driven this share price anywhere and all it's done has gone down since we bought in.' "
But while EA's offer of $26 a share is a hefty 64% more than where shares traded on Feb. 19, the date EA sent its written offer to Take-Two, it's only a 23% premium to where the stock traded nearly a year ago, when Strauss Zelnick and a host of new executives and board members took over the company.
That's one reason some investors are holding out for a bigger payday. One money manager who specializes in video game investments said Monday that he has kept his entire position on the expectation that when Take-Two does agree to a sale, it will be for a price that's closer to $32 per share.
Shares of EA, meanwhile, closed 5.2% lower to $47.14 on Monday and led all decliners on The Hollywood Reporter's Showbiz 50 stock index.
Paul Bond in Los Angeles contributed to this report.