Second strategy spin at Take-Two

Zelnick puts focus on management integrity, 'GTA's' success

The new management at Take-Two Interactive Software Inc. will shed the company's unprofitable assets and clean up some significant messes left by previous executives. Just don't expect it to abandon its infamous "Grand Theft Auto" franchise anytime soon.

"It's our James Bond," said Strauss Zelnick, the new chairman of Take-Two, in a conference call Tuesday that laid out the new team's strategy.

Zelnick, at the behest of such major shareholders as OppenheimerFunds, D.E. Shaw Valence Portfolios, SAC Capital Management, Tudo Investment Corp. and his own ZelnickMedia, seized control of the board late last month.

Since then, CEO Paul Eibeler was replaced by Benjamin Feder, CFO Karl Winters resigned, and most of the board was ousted.

Zelnick, on the conference call with analysts, said he and Feder are impressed with the high morale of company employees, considering what the company has been through.

Previous indiscretions include former CEO Ryan Brant becoming the first chief executive convicted in the ongoing stock-option backdating scandal; an investigation by the U.S. Securities and Exchange Commission into accounting practices; congressional inquiries into secret sex scenes hidden in versions of "Grand Theft Auto" franchise games; and, until recently, a steadily eroding stock price.

Zelnick began Tuesday by promising "utmost integrity" from upper management and board members.

The company said Tuesday before its conference call that it has regained listing compliance with Nasdaq, so it no longer is in danger of delisting. The news didn't help shares, though, which sunk 1.8% to $20.38.

Zelnick said that the company's 2K Sports division might not turn a profit this calendar year despite the assurances of previous management. "It might be hard to obtain," he said. "It's not a lock."

Zelnick is a former CEO of BMG Music and president and COO of News Corp.'s 20th Century Fox. He's also no stranger to video games, having headed Crystal Dynamics more than a decade ago, before it was sold to Eidos Interactive and made a name for itself with the "Tomb Raider" franchise.

Zelnick also helped to create BMG Interactive, which eventually was sold to Take-Two, an irony he spoke to analysts about Tuesday.

Besides the 2K Sports update, Zelnick and Feder, also an alum of News Corp., did not change previous fiscal year guidance of second-quarter revenue that's expected to fall 25% year-over-year.

Feder, who will reign as CEO until the company is whipped into shape and a permanent CEO is hired, predicted a "highly productive year" in 2008 from the development of games with "real market potential." Those lacking, will "get killed early," he said.

The company is often criticized for relying too heavily on "Grand Theft Auto" and other franchises while not quickly enough introducing new potential hits, especially in what is becoming the lucrative area of simple-to-play, nonoffensive games that appeal to younger and older demographics.

Zelnick noted the criticism but also pointed out that the company's Rockstar Games unit boasts a half-dozen million-game sellers aside from the "Grand Theft Auto" titles.

Answering an analyst concerned that "Grand Theft Auto" would some day lose its allure, Zelnick noted that last year's "Casino Royale," the 21st of the 007 films, was the franchise's best-performing title.

Feder and Zelnick stressed that they are long-term investors who won't soon be selling their shares.

"A fresh start with senior-level management, while not necessarily solving the historical problems, places the company in a better position for the opportunities that lie ahead," said BMO Capital Markets analyst Edward Williams, who rates Take-Two shares a "market perform."

The analyst has a $20 target on shares, indicating his expectation that the stock will fall slightly during the next 12 months or so.
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