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Jan 31, 2009

Grand Theft Auto IV and Real-World Billions

The thousands of gamers rushing out to buy Grand Theft Auto IV were almost certainly heading back to their couches to get lost for hours in a vivid and seedy virtual world.

But in so doing, they also are playing a role in the real world – in an unfolding drama where hundreds of millions of dollars in actual money is at stake.

The frenzy of interest in GTA IV – both the early sales projections and strong game reviews – has given a modest boost to the stock of the game’s publisher, Take-Two Interactive. It closed on Tuesday at $26.63, up 16 cents from the day before.

In the previous few trading days, the stock has been climbing slowly from just under $26.

Those are pennies that could make an important difference in Take-Two’s future. And in that of its shareholders’ wallets.

The back story (that you likely already know) is that Electronic Arts, the video game behemoth, has begun a hostile takeover bid for Take-Two. Electronic Arts has offered $2 billion, or $25.74 a share, a price that Take-Two has rejected as insufficient.

Further, Take-Two’s management has said it would not negotiate acquisition terms until the introduction of Grand Theft Auto. Take-Two declined to say whether such negotiations have begun.

Given the current price of the stock – $26.63 – Take-Two obviously is not going to accept an offer for $25.74.

“The critical and consumer response to Grand Theft Auto IV vindicates our strategy of waiting until the launch with regard to E.A.’s offer,” said Strauss Zelnick, the chairman of Take-Two, in a statement.

So that’s that, then? Electronic Arts will have to raise it’s offer? Actually, not necessarily. The issue is going to be more complicated than that.

For its part, Electronic Arts has said all along that it expected a huge unveiling of Grand Theft Auto IV (industry analysts said it could sell 5 million copies in two weeks).

“We’ve seen a share price above and below our offer and it doesn’t change anything. We knew the game would be an extraordinary success,” said Jeff Brown, a spokesman for Electronic Arts. “All of that was factored into our offer of $2 billion.”

Also, E.A could make the case that the modest increase in Take-Two’s stock shows some caution on the part of Take-Two shareholders. After all, with a huge game like Grand Theft Auto IV hitting shelves, one could rightly expect a more considerable boost to Take-Two’s shares.

On one hand, the relatively modest increase in Take-Two’s shares could prompt E.A and Take-Two to act quickly. Take-Two would theoretically do so because it’s not sure how much more it can expect shares to rise in the short term, and would do so because Electronic Arts can justify to its own shareholders a price increase, given that its current offer is below market.

On the other hand, the increase in Take-Two’s stock could serve to greatly prolong talk of an acquisition. Take-Two might feel the market is just beginning to validate its business and that the stock is only just starting to rise. But E.A could be intent on sticking with its price and feel that the longer it waits, the more the enthusiasm spawned by Grand Theft Auto IV’s introduction will wear off.

The bottom line? The stock increase is a little bit like the results of the Democratic primary in Pennsylvania. The long-term impact depends a bit on the expectations you went in with, and the spin it will spawn in the ensuing weeks.


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