Board change just a start for game maker Take-Two
LOS ANGELES, March 28 (Reuters) - Investors poised to seize control of Take-Two Interactive Software Inc. (TTWO.O) will need to cut costs and find ways to get new video game hits from the makers of "Grand Theft Auto" to secure long-term support from Wall Street.
A consortium of investors owning 46 percent of Take-Two's stock is expected to muster the votes needed to oust most of the company's directors at its annual meeting in New York City on Thursday.
The group, which includes Oppenheimer Funds, then plans to give walking papers to Chief Executive Paul Eibeler and consider whether to keep Chief Financial Officer Karl Winters.
While investors have cheered the move by dissident shareholders, analysts caution that the hard work is just beginning at the company, which is essentially a one-hit wonder with an extremely well-paid cadre of designers who need to be pushed to help the company turn around.
"A new era may be upon us, but clearly Take-Two has deep-rooted structural issues," Piper Jaffray analyst Anthony Gikas said.
"Grand Theft Auto" is one of the industry's best-selling game series, having sold more than 50 million units globally at prices of as much as $50 each. The franchise accounted for nearly 40 percent of company revenue in 2005, according to shareholder advisory firm Proxy Governance.
The virtual chaos, crime and controversy served up in those games is mirrored at the company, which has had its own legal tangles and scandals stemming from allegedly fraudulent accounting, misuse of stock options and undisclosed sexual content in "Grand Theft Auto: San Andreas."
Still, investors are enthusiastic about the launch of "Grand Theft Auto IV" later this year and heartened by the prospect of change at the top.
Shares, which fell below $10 in mid-2006 on the San Andreas scandal, have topped $20 and trade at a multiple of 28 times estimated earnings for its fiscal year ending October 2008.
Meanwhile, the stocks of bigger rivals with better track records, Activision Inc. (ATVI.O) and Electronic Arts Inc. (ERTS.O) trade at multiples of 24 and 23 respectively for their fiscal years ending March 2009, when there should be a bigger audience of video game consoles to buy games.
"Investors are overly optimistic about the prospects of a turnaround," said Wedbush Morgan analyst Michael Pachter.
Soleil-Hudson Square Research analyst Daniel Ernst called the shareholder revolt necessary but said it is not enough to ensure the company's long-term viability.
"It should be obvious that any sequel peaks. The challenge at Take-Two is to come up with something to fill its shoes," he said, noting that companies like Nintendo Co. Ltd. (7974.OS) and Pixar Animation Studios (DIS.N) have simultaneously turned out sequels and new hits.
Analysts said Take-Two's generosity toward the leaders of its Rockstar Games studio, including superstar brothers Sam and Dan Houser, is a key obstacle. Continued...
