Grand Theft Auto IV is the big prize for EA

The next big thing in video games landed on store shelves on April 29. By the end of this weekend, Grand Theft Auto IV is expected to have generated some US$400 million in sales, eclipsing the record-breaking numbers of Halo 3.

But as retailers held midnight sales events and eager fans lined up to get their hands on a copy of the game—a violent gangster story in which players take on the role of Eastern European immigrant Niko Bellic—a vicious battle raged behind the scenes. Electronic Arts, the world’s largest video-game publisher and a major employer in the Vancouver area, is trying to acquire Take-Two Interactive Software, which owns Rockstar Games, the publisher of GTA IV. (EA employs more than 2,500 people at the campus in Burnaby known as EA Canada, EA Black Box in downtown Vancouver, BioWare in Edmonton, and EA Montreal.)

The fireworks began in February when the California-based EA submitted a private takeover proposal worth US$2 billion to New York–based Take-Two. When the Take-Two board of directors rejected the offer, EA made its bid public. But the Take-Two board, insisting that the offer of $26 per share undervalued the company, again refused the takeover.

Why does EA want Take-Two so badly? GTA IV is one reason.

When I interviewed Rory Armes, senior vice president and group general manager of EA’s four studios in Canada, in April 2007, he said that EA CEO John Riccitiello had made the development of new (rather than existing) intellectual properties a primary goal of the company. Last year’s acquisition of development studios BioWare and Pandemic gave EA the valuable franchises Mass Effect and Mercenaries. Bringing Rockstar under the EA umbrella would take the company further in that direction.

Rockstar has two studios in Canada. Rockstar Vancouver developed the game Bully, and Rockstar Toronto created The Warriors, based on the ’70s cult film. Bully and GTA are called sandbox games because players do not have to progress through the story in a linear fashion, but can roam the entire environment—Liberty City, based on New York City, in the case of GTA IV—and undertake story missions only when they want to. It’s a genre that Rockstar perfected and has continued to refine.

The other reason EA wants to acquire Take-Two is sports games. Acquiring Take-Two would put an end to EA’s primary rival in the genre. 2K Sports—part of Take-Two and publisher of NHL 2K, NBA 2K, and Major League Baseball 2K (for which it has an exclusive licence with the league)—could be folded into EA Sports. Riccitiello has been downplaying this aspect of the acquisition, but it would give EA an effective monopoly in the sports-games genre. As Armes told me last year, “Need for Speed and FIFA are consistently in the top three games in the world. We’re never going to lose a sports game. But we’ll start adding others.”

Publicly rebuffed in its attempt to acquire Take-Two, EA took its offer directly to shareholders in March. Knowing that GTA IV would be released at the end of April, EA set its tender offer to expire on April 18. April 18 was also the day after Take-Two’s annual general meeting.

At Take-Two’s 2007 AGM, corporate-restructuring specialist Strauss Zelnick led a group of investors in ousting former CEO Paul Eibeler and five other board members. Zelnick set up a new management team and was elected chair of the board. History was not going to repeat itself, however, because the rules for this year’s meeting stipulated that the only shareholders welcome were those who owned stock before EA made its offer. Which meant that anyone who bought stock after the takeover attempt began wouldn’t get to vote.

At the AGM, Take-Two’s board was reelected, and it reiterated its rejection of the EA proposal. The shareholders—those who were permitted to attend the meeting—also approved an amendment to Take-Two’s stock-incentive plan, which caused new shares to be issued to ZelnickMedia, the company led by chair Zelnick. The move can be interpreted in two ways: as Zelnick trying to hold on to control, or Zelnick trying to increase his earnings from the takeover of Take-Two.

It’s clear what EA believes is going on. The company immediately revised its offer to $25.74 per share to reflect the additional shares being issued, and extended the window to May 16.

So EA hasn’t been able to put its logo on GTA—yet. But despite Zelnick’s efforts to push up EA’s bid and cash out, I bet this deal will happen sooner rather than later. We’ll see the EA logo on a reprint of GTA IV this summer.