Analysis: Does A Take-Two Takeover Make Sense?

[Gamasutra editor-at-large Chris Morris discusses whether Take-Two Interactive would benefit from an acquisition at the moment, noting that anyone looking to buy will most likely "have to pony up a boatload of cash."] Here we go again. With earnings becoming more dependable, another GTA game lurking in the shadows and key talent locked in for the next few years, it was only natural that talk of a Take-Two acquisition would resume. But today's Take-Two isn't the same company it was when EA came knocking on the door. And the takeover that once seemed a foregone conclusion in the gaming world is now a lot less certain. Sterne Agee analyst Arvind Bhatia is beating the acquisition drum loudest these days, saying the renewed employment deals for the Housers and other key talent at Rockstar make Take-Two "a more attractive acquisition candidate." He's right, of course. On the surface, anyone with a shot at having a development team and a stable of franchises that strong would be a fool not to attempt a takeover. The question is: Would Take-Two benefit from that? The answer, in large part, depends on the offer. Keep in mind that the chief responsibility of the board of directors at Take-Two is to ensure that shareholders get the most for their investment in the company. In 2008, EA made what seemed at the time a generous $2 billion bid for the company. Confounding some, Take-Two management rejected the offer – saying the valuation of $25.74 per share undervalued the company. Take-Two shares are well below that level these days (trading in the $16 range), but before the October 2008 stock market flash-crash, they traded as high as $27.65 – proving the management's point. Any offer that came in today would likely be lower than what EA bid – and while the company's shareholders, which include activist investor Carl Icahn (who owns a more than 11 percent stake), don't want to hold Take-Two forever, they don't want to give it away in a fire sale. Take-Two has come a long way from 2007, when CEO Strauss Zelnick and his team took over after an accounting scandal by the previous management. It has turned a profit in a year without a GTA release and it has built up several strong franchises in the process, including BioShock, Red Dead and, most recently, L.A. Noire. In addition, the sports division has finally started to carry its weight, with NBA 2K becoming the dominant brand in basketball games. And after the conclusion of the 2012 season, the company will finally shed the albatross of a deal previous management signed with Major League Baseball, which will cut expenditures substantially. While all of these positives will certainly turn heads of potential suitors, they'll also sound a warning bell or two in the accounting departments of those companies. ZelnickMedia announced Tuesday that it has extended the agreement to continue running Take-Two through 2015 – with caveats for a buy-out or other conditions, of course. Some of that was housekeeping, but it was also a way to signal to possible acquirers that anyone making a bid on the company had better come with a strong one, because Strauss & Co are there for the long haul, if necessary. Ultimately, Take-Two is now on pretty equal footing with its one-time pursuer EA. Both houses were in disarray a few years ago – and investors punished them for that. But in the last few months, they've shown that their turnaround plans are working – and have positioned themselves for continued growth in the coming years (albeit on different tracks). That has put both companies back on people's radars. And with its smaller market cap, Take-Two is being viewed as the more likely acquisition target. But I suspect that Zelnick and the board are once again eyeing the long-term and know that by cashing out now, they could lose a lot of money down the road. If another company wants to add GTA et al to its catalog, it's going to have to pony up a boatload of cash – more, in fact, than might make immediate sense to its investors.