Electronic Arts vs Take-Two Interactive

I had originally thought of blogging about another major technology buyout, between NVidia and Ageia, but I had decided against it as it would be of very little interest to anyone who was not in the chip design business. From a business standpoint, it was a fairly straightforward buyout of a small and ailing company with a niche product that can complement NV products. Then today, I heard of EA offering $2.0 billion for Take-Two Interactive (T2). Now, that's interesting news.

In this brewing battle, EA is the 800 pound gorilla. It is unquestionably the largest third party video game publisher in the world. EA has always been synonymous with sports video games. In recent years, EA has also become infamous for it's less than optimal working conditions. Even with burgeoning profits, it has always been purely profit driven, which is what every large corporation does.

As the undisputed behemoth of gaming software, it has always expanded by acquisition. Things were not always rosy in EA's past. However, with several strategic takeovers in the 90s, it managed to build itself into a video gaming powerhouse. Some of their better known purchases are Maxis (makers of SimCity and all things Sim), Westwood (the people who introduced the whole world to real-time strategy), Bullfrog (who took strategy games to a whole new level), Origin (makers of the hugely successful Ultima series), and Bioware (exclusive makers of all AD&D based games). However, even with it's line up of successful game franchises, it has surprisingly, not crossed swords with T2. So, a buyout of T2 would only enrich EA's portfolio of games.

The story goes that EA made an offer of a 50% premium on the present T2 stock price. They expressed this offer through a private letter to the board chairman of T2. The board very quickly rejected such an offer. EA has generally had a successful history of takeovers. But they have never had to court someone of T2's calibre in the past. They tended to buy up companies as they were falling behind, rather than to make an offer for a company that is well in it's prime.

T2 is most famous for breaking new ground in video games. It's most famous franchise is the Grand Theft Auto (GTA) video game series of questionable content. When it came out, GTA was a welcome change to the lack-lustre video game market that seemed to have run out of new ideas, and became a cult-phenomenon. GTA was by no means the first video game featuring senseless violence. But it did it in such an open-ended way that made senseless violence a choice for which users could make. And it didn't stop there.

It also broke new ground in video game litigation. It has Jack Thompson to thank for it becoming infamously embroiled in the Hot-Coffee scandal. In GTA3, some members of the public had modified the game to include a scenario where the player could go home with his girlfriend for somewhat more than just coffee. Where games were previously only suggestive in what went on behind closed doors, developments in graphics technology allowed gamers to observe a fairly graphic representation of developments. Needless to say, it cemented the GTA series in the minds of gamers everywhere and the case probably helped the game fly off the store shelves.

The timing for this offer could not be better. EA was probably hoping to catch T2 sleeping and snap up a cheap deal. The 50% premium that EA had offered would seem very generous to most people. However, I can clearly understand how the T2 board would reject such an offer immediately. GTA4 is going to be released in a couple of months' time. If initial impressions are anything to go by, GTA4 will be a runaway success. T2 is expected to reap a huge profit off the next instalment of the franchise. So, if any of the T2 shareholders are smart, they will hold-out for a few more months to force EA to raise it's offer.

Personally, I don't really want to see this buyout succeed. As well as EA delivers value for it's shareholders, it is a boring company. They are like the Hollywood of video games. They are very good at churning out more of the same old, same old. However, the innovation has mainly come from their external acquisitions. It can be said that the only third party publisher that can possibly compete with them is T2. So, this buyout will be to eliminate competition and I'm not a fan of monopolies.

Unlike the Microsoft v Yahoo case. I believe that if this buyout fails, both companies will just continue to progress on their own. The video gaming industry is sufficiently cut-throat that it would be madness to attempt a battle of attrition. A slight misstep could result in both companies crashing out spectacularly. There really isn't anything exciting if the takeover works. The combined entity would just be big and boring.