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Will EA buy Take Two this week?

Michael Pachter
Analyst, Wedbush Morgan
May 13, 2008

The outcome to the above question really depends upon Take-Two. I think EA has made clear that it considers its $26 offer (now $25.74) to be fair, and Take-Two has made it clear that it considers the offer inadequate.

After several attempts to meet with Take-Two privately were rebuffed, EA took its case to the public.

Now that Take-Two's completely artificial deadline has past, it seems prudent on both sides that the companies are talking.

My guess is that they are far apart on price, with EA willing to go only modestly (perhaps $2.00) above its last offer, and with Take-Two asking for more. If Take-Two is willing to compromise on price, I think a deal will be reached.

Interestingly, the restricted stock award granted to Take-Two's management gives them a perverse reason to delay any acquisition.

Under the terms of the grant, Take-Two management vests in 600,000 shares (plus the potential for another 180,000 shares in its Board's discretion) if a deal is completed before April 2009.

If a deal is completed on or after April 1st, 2009, the management gets 1.5 million shares. This means that the management stand to gain around $20 million or so of compensation if they can hold off a deal for another 10.5 months and complete it at the same price.

They are indifferent if they can secure an offer of $20.50 or so a year from now (their 1.5 million restricted shares plus their two million stock options are worth about the same at $20.50 a year from now as the lower number of shares is worth at EA's offer price).

I am NOT suggesting that management would do anything unethical, and am comfortable that they will endeavor to act in the best interests of their shareholders. However, they have a financial incentive to find things wrong with doing a deal now, and if they are able to extract even a penny more a year from now, they will gain mightily.

So with all that said, it really depends upon whether Take-Two is willing to deal with EA on a reasonable basis, and ask for a price that is within range of EA's price ceiling. I'm not sure what either party will do.

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