Sunday, September 14, 2008

Electronic Arts Walks from TTWO Talks

"Electronic Arts Inc today announced that while EA continues to have a high regard for Take-Two's creative teams and products, after careful consideration, including a management presentation and review of other due diligence materials provided by Take-Two Interactive Software Inc., EA has decided not to make a proposal to acquire Take-Two and has terminated discussions with Take-Two.

John Riccitiello, Chief Executive Officer of EA, said: "EA is tracking toward a record breaking year. We're launching 15 new games including award-winners like SPORE, Dead Space and Mirror's Edge, great new titles from the Sims, new family titles with Hasbro, and the highest quality slate of EA SPORTS titles on this generation of consoles. We're also expanding beyond our core business with a series of direct-to-consumer launches including Warhammer Online."

(Taken from

First, I think that the tone that ERTS used is noteworthy. Though the reaction tomorrow may still be negative for TTWO shares, ERTS said nothing to that effect in their statement. In fact, from my point of view, it was mildly positive - ERTS seemed to say, "We're more focused on turning around our money-losing business right now than spending the appropriately-large amount of money on TTWO's successful one."

It will be interesting to see TTWO's reaction tomorrow. Though I have a long bias, I must admit that an initial drop will likely occur. I'll be buying if it does. TTWO is on track to make $2/share this year; no other company in the video game industry (and really very few companies besides integrated oil industry) trade at a 10 p/e. TTWO has a steady stream of releases for the rest of the year, the holiday season, and beyond.

Though I initially and continually touted a possible merger, I recognized that value may be better maximized when ERTS stopps capping TTWO shares with the $25 merger ceiling. Therefore, I think that going forward - whether at 3:30 tomorrow, this friday, or next April - TTWO share should be trading at a higher price than they were at Friday's close.

It looks like my calls may expire worthless, but it was a gamble that I don't regret taking. The earnings TTWO reported about ten days ago were unbelievable, and the street could have, under other circumstances, applauded loudly. Observing the ERTS' Take-2 tango was certainly a good experience for this young, often-speculative investor to experience.

I'll be sure to disclose any new position I take if conditions are ripe enough tomorrow morning.

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