Analyst: Take-Two Could Be Weakening

As it comes up on the close of its fiscal year, Take-Two's performance will see particular scrutiny from analysts, both the professional and the armchair varieties. Throughout this year, Board chairman Strauss Zelnick took a stand on his company's long-term value as it warded off Electronic Arts' takeover, and Take-Two's upcoming financial results seem likely to show the merits -- or not -- of his position. But alongside the challenges all publishers currently face in the economic environment, the past takeover bid becomes only a small part of the story. In Spring and Summer, EA traded in the $40 range, and offered $25.74 for Take-Two, which, at its highest in Grand Theft Auto IV's afterglow, peaked at $27 or so. These days, the macroeconomic environment has created an entirely different picture -- most major publishers have seen their value cut in half at the very least. EA now trades in the $17 range, and Take-Two at $12, meaning the $30 per share analysts speculated Take-Two would accept for a possible acquisition is a relic of an era past. Wedbush Morgan analyst Michael Pachter expects that Take-Two will report revenue of $290 million when it holds its results announcement this Wednesday, but that might not be enough for the company to meet its own goals -- likely a common refrain for many publishers in the current climate. Pachter uses NPD data to estimate that Take-Two's publishing revenues could be down as much as 21 percent since October, depending on how many units of Midnight Club: Los Angeles and of the company's 2K9 sports titles, NBA and NHL, it sold. "Of note, we have recently seen [Midnight Club: Los Angeles] discounted to $39.99, a sign that demand for the game is tepid," says Pachter, who maintains that Take-Two's outlook for 2009 will probably be "too optimistic" as GTA IV revenue declines and as the company reaps relatively little revenue from online business models. "At the same time, the contracts of key Rockstar employees Sam and Dan Houser expire in February 2009; we question whether Take-Two can retain them, and if so, at what cost," Pachter says. If Take-Two encounters financial softness, it won't be alone, as many publishers confront the economy as they aim for profitability next year. But according to Pachter, that doesn't mean the company is again about to become a target of an Electronic Arts buyout. "It appears to us that EA is serious and will not renew its efforts to buy Take-Two over the near term," says Pachter. "We do not expect EA to renew its offer in the next several months." So did Take-Two miss a window of opportunity that would have ultimately been of benefit to its shareholders as the downturn hits? Maybe, says Pachter, although extenuating circumstances make it hard to speculate on what might have been. "All of the video game stocks are down, and many by at least 50 percent," he tells Gamasutra, listing THQ and Activision alongside EA and Take-Two. "Ubisoft and Nintendo are not down as much, but are still down substantially. So it's hard to say that they should have sold in a vacuum, but their shareholders would certainly be better off if they had."