Signup for our free newsletter:

Take Two Interactive Stock

Written By Brian Hicks

Posted March 28, 2008

America is knee-deep in a recession. The Oracle of Omaha thinks so. The chairman and CEO of Caterpillar thinks we may be in one. Even George Soros believes this is the "worst market crisis in 60 years."

But shhh . . . don’t tell the gamers.

Even as jobs are lost, homes sink into foreclosure, liquidity and consumer spending falls to the wayside–gaming sales seem to be recession-proof . . . at least according to the latest NPD market research numbers. Total sales, including hardware, software and accessories, were up 34% year over year, nailing $1.33 billion and bettering January’s $1.18 billion, according to that report.

Yep, even in the red sea of economic woes, the U.S. gaming industry is still strong. We’ve already seen overall 2007 sales balloon to $18 billion, a 43% increase over 2006.

Hardware system sales are already outpacing 2007 sales by 28%, according to some reports.

U.S. gaming companies are virtually unscathed. Economic malaise hasn’t swayed Activision’s December 2007 announcement of an $18.9 billion merger with Vivendi Universal, nor did it sway Electronic Arts from offering $26 a share to take over Take Two Interactive stock–a deal rejected for the second time.

Take Two Interactive Stock Is No Stranger to Controversy

Gaming is only expected to grow, especially when Take Two Interactive (TTWO:NASDAQ) releases its long-awaited blockbuster Grand Theft Auto IV. So why would Take Two, which is releasing a follow up to its most successful game, sell itself to Electronic Arts for $26 a share?

It may not, having rejected the Electronic Arts offer for the second time, saying $26 is "inadequate in multiple respects and contrary to the best interests of Take Two’s shareholders." In an SEC filing, the company even recommended that shareholders not "tender any stock."

While TTWO has said it is willing to speak to "interested parties, including EA," prior to the TTWO launch of Grand Theft Auto IV, the deal could lose value, says Electronic Arts.


Take Two Interactive stock chart

"EA’s offer price of $26.00 per share is full and fair, and reflects the value of Take-Two’s intellectual properties, talent, and operational progress.

"By advising its stockholders to reject the offer, Take Two’s Board is exposing them to further delays which may reduce the value and the certainty of a potential transaction."

But considering the near-term sales potential behind Take Two, Electronic Arts would be foolish not to offer more.

When Grand Theft Auto III was released in October 2001, it sold 11 million games annually afterwards. At $50 a game, that’s more than $550 million.

When Grand Theft Auto: Vice City was released on October 27, 2002, it sold more than 13 million games annually. At $50 game, that’s more than $650 million.

And when Grand Theft Auto: San Andreas ("GTA:SA") was released in October 2004, selling 12 million copies its first year out, the game did more than $600 million in year one. Sales of this one game were so big that Take Two even announced that it was a significant contributor to Q1 2005 numbers. Net sales for that quarter were $502 million, a 34% jump in a year. Net income was up 74% in a year.

And Grand Theft Auto IV could sell nine to ten million games by year’s end.

But while Take Two can ask for a higher offer, it may not get it. And Electronic Arts could just walk away, a move that would quickly refill the TTWO bullish gap up at $18. At this point of the standoff, your best bet is to play near-term downside with TTWO puts (April 2008 25 put, for example), and load up on near-term calls ahead of the Grand Theft Auto IV release.

But be cautious. In this game, you can buy the whole seat . . . but you’ll only need the edge.

Ian L. Cooper