Pachter: EA Take-Two Takeover Unlikely

In his latest note to investors, Wedbush Morgan analyst Michael Pachter has detailed his reasoning on why it's unlikely, as some have posited, that EA will make a bid for Take-Two, as well as expressed a lack of confidence in management and GTA IV's timely release. "One of our competitors recently floated the idea that Take-Two would make an ideal candidate for acquisition by Electronic Arts," said Pachter, but adding that "we don’t think this is at all likely," for a number of reasons. First, he continued, was a matter of corporate culture. Between "open-ended delivery dates, artistic freedom, and incredibly violent games," as well as "several teams... that produce only one game every two years," and "games with sufficient sexual content and violence to receive AO ratings," the combination is "something that would not be tolerated at EA." Further, "not withstanding the immense value many would place on the GTA franchise," the publisher is in a "very low cash position," with its sports licenses, bloated overhead and few games "incremental to EA’s," apart from GTA, Bioshock and Civilization. "The company’s sports games and its Midnight Club franchise are duplicative of other EA games," he noted, "and an acquisition of these rights would only make sense if EA were to choose to shut them down. We believe that EA would benefit from a sports and street-racing quasi-monopoly, but do not believe that the company is willing to pay a premium to do so." Finally, said Pachter, EA hasn't been a successful bidder on any other "fire sale" assets from publishers like Atari, 3DO, Acclaim and Eidos, despite each with their own successful franchises like Stuntman, Tomb Raider, Hitman, Juiced and Turok. "We think that EA’s reticence to bid on any of these assets speaks volumes about the company’s approach to acquisitions," said Pachter, "and note that its recent M&A activity involved companies like Criterion (makers of Burnout), Mythic (makers of Dark Ages of Camelot) and Digital Illusions (makers of Battlefield), each for under $100 million." "EA appears to us to prefer bite-sized acquisitions, and we think the company is unlikely to make a move on Take-Two," he concluded on the matter, adding that even other floated likely Take-Two bidders such as News Corp. would be hard pressed to make moves "without the confidence that it is buying a strong management team." On that note, Pachter added that Wedbush remains "unprepared to express confidence in Take-Two management until we see some positive results," despite doing "many things right," with "several structural obstacles" remaining. "The company has begun an initiative to improve the green light process for new projects," he said, "but given the delays of Manhunt and GTA, its process for monitoring projects under development still appears to be a work in progress." Without better results, Pachter says he is "uncertain that GTA (or any other major franchise) will arrive on schedule, and remain skeptical that any other franchise [such as Max Payne, Red Dead Revolver] will be regularly repeated."