Take-Two Interactive shareholders should take Electronic Arts offer
Posted by: in Latest NewsFiled under: Deals, Electronic Arts (ERTS)
Electronic Arts (NASDAQ: ERTS) failed to win over the majority of Take-Two Interactive (NASDAQ: TTWO) shareholders with its hostile bid of $25.74.
According to the Wall Street Journal (subscription required), Electronic Arts now says it may lower its bid, with a company EVP saying that “The passage of time, whether due to regulatory issues or intransigence by Take-Two management, will diminish the value and certainty of our offer.”
I’m not so sure. Take-Two shareholders rejected the bid, presumably because they feel that it’s inadequate. It’s hard to comprehend how a lower bid would be more enticing. With just 8.3% of shares tendered in EA’s offer, the company is not close to completing a deal.
Take-Two executives state that the bid undervalues the company’s turnaround effort and upcoming release of the latest game in the Grand Theft Auto series.
But I think shareholders might be overdiscounting some of the bizarre risk factors that come with Take-Two Interactive, which has historically been a corporate governance Porta-Potty. Here’s a quick sample of the least boilerplate of the more than nine pages of risk factors included in the latest 10-K:
Our involvement, and the involvement of some of our former executive officers in a wide variety of lawsuits, investigations and proceedings has had, and might in the future have, a material adverse effect on us.
We and some of our former officers, directors and employees have been, and are subject to, a wide variety of lawsuits, investigations and proceedings, including the following:
Former Officers. Our former Chairman and Chief Executive Officer pled guilty to two felony counts relating to our historical stock option granting practices and the Securities and Exchange Commission instituted a civil action against him. In addition, certain other former officers have been convicted of crimes relating to their conduct during their employment with us.
Stock Option Granting Practices. In 2006, a Special Committee of our Board of Directors conducted an investigation into our historical stock option granting practices. The Special Committee determined that there were improprieties in the process of granting and documenting stock options and that incorrect measurement dates for some stock option allows had been used for financial reporting purposes. As a result, we recorded additional non-cash stock-based compensation expense and related tax effects with respect to some of our stock-based awards and restated certain previously filed financial information in our Annual Report on Form 10-K for the fiscal year ended October 31, 2006. Several derivative complaints and a class action complaint have been filed in say and federal courts against some of our current and former directors and some of our former executive officers relating to our historical stock option granting practices.
FTC Consent Order. We have entered into an agreement with the staff of the Federal Trade Commission containing a consent order that requires us to maintain a comprehensive system reasonably designed to ensure that all content in our electronic games is considered and reviewed in preparing submissions to a U.S. rating agency. We have also concurred to represent accurately the rating and content description for games we publish and to disclose to consumers the presence of any content relevant to the rating that wasn’t disclosed to the rating authority.
Personal Injury Actions. We’re named as a defendant in a number of personal injury and wrongful death actions.
SEC Investigation. We have received a notice from the SEC that it is conducting a formal investigation into certain stock option allows made by us. We’ve also received a “Wells” notice informing us of the SEC’s intention to file charges and seek a civil monetary penalty in connection with this investigation.
IRS Request for Information. We have received a request for information from the Internal Revenue Service relating to the granting and exercise of certain stock options and tax deductions taken by us with respect thereto.
Other Inquiries and Proceedings. We have received grand jury subpoenas issued by the District Attorney of the County of New York and from certain say attorneys general relating to some of our products, our historical stock option granting practices, the termination of our former auditors and other matters.
The investigations and charges against us or other current or former officers, directors or employees have imposed, and are likely to continue to impose, significant costs on us both financially and as a result of the distraction of our management team. While we’re unable to estimate the exact nature or amount of these future costs, we believe they’ll likely include:
- damage to our reputation and business relationships;
- professional fees in connection with the conduct of the investigations and the defense of related litigations and other proceedings;
- potential damages, fines, penalties or settlement costs imposed on us;
- advancement of certain expenses and reimbursement of certain amounts payable by, or on behalf of, our current and former officers, directors and employees subject to the investigation or named in any litigations or other proceedings pursuant to our indemnification obligations; and
- potential impairment of our capability to obtain coverage and reimbursement under existing insurance policies, and a potentially negative impact on our future insurance coverage.
- potential impairment on our capability to raise capital, debt and equity
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