Monday, August 25, 2008

Electronic Arts Wining and Dining Take-Two

According to a Reuters press release after-hours, Electronic Arts (ERTS) and Take-Two (TTWO) have now entered into confidential discussions regarding a potential merger.

This is the latest development in a soap-opera-like courtship that has disappointed TTWO investors as the share price has been stagnant since ERTS's first offer of $26 this spring. ERTS extended the offer multiple times throughout the summer. ERTS withdrew the offer earlier this month, but agreed to view a presentation of non-public material by TTWO's executives.

This disclosure of privacy should stoke investor speculation that a new offer may be in the works. Whether an offer is publicly made, however, remains to be seen. Electronic Arts seemed set on acquiring TTWO at $26, but many investors thought that the bid was a shrewed tactic to cap TTWO's share price as it released Grand Theft Auto IV, the biggest game release ever. But Electronic Arts shareholders may be disappointed by a higher bid, as each dollar increases the takeover price by about $75 million. A price in the $30s, which would represent a reasonable premium in light of GTA's success and TTWO's earnings potential, would represent a bid increase of hundreds of millions of dollars.

I may sell some of the options, likely the 30s, if TTWO share prices (or options premiums) pop tomorrow at the open. After speculating twice on this merger, I'm willing to take profits when I can (hopefully) get them. TTWO didn't move much after hours, so maybe longs aren't enthused by this hype anymore. However, TTWO and ERTS will probably clear the air with a new bid or a conclusive "not-interested" statement fairly soon.

I held TTWO calls that expired (worthless) at the end of August, and did buy September calls at both the 27.5 and 30 strike.

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