Take-Two deal helps vidgame stocks

THQ, Midway, Atari see bumps after EA bid

By BEN FRITZ

Feb. 25 was a big day for vidgame publisher THQ's stock, which rose by 10%. Ditto Sumner Redstone-controlled Midway, which went up 7%, and Atari, up 13%.

It wasn't a big day for the actual companies, however. None had any notable news or financial developments. The stock surge was spurred by a competitor, Take-Two Interactive, becoming the subject of a public acquisition bid by industry giant Electronic Arts.

EA's move is the latest sign that the business of making and marketing console games will likely soon look like the film biz -- controlled by a handful of big players that are part of already established multimedia congloms.

Getting there requires consolidation, however, and even though EA's $2 billion offer was rejected by Take-Two, the move spurred Wall Street's conclusion that most of the smaller vidgame publishers -- meaning everyone except EA, Activision, and possibly Ubisoft -- are likely to be bought in the near term.

It started last year when Activision agreed to merge with Vivendi Games, which owns the uber-successful "World of Warcraft" but is otherwise a relatively small player.

"The financial pressures of competing have gotten so acute that scale has become critical," says Arcadia Investment analyst John Taylor. "Most of the independents with sales below $1 billion per year are going to struggle."

If EA doesn't end up landing Take-Two, it's very possible it will go after another small publisher. Beyond EA, the only existing publisher with the scale to buy a smaller one would be Activision, but most of its attention and cash is tied up with Vivendi. That's why insiders say the other likely acquirers would be traditional media companies like Disney, Time Warner, Viacom or News Corp that are investing in or looking at the vidgame biz.

They'll be faced with several potential acquisitions, each with its own benefits and drawbacks:

• Take-Two has one of the industry's biggest properties in "Grand Theft Auto" but hasn't found a way to be profitable in years without a "GTA" game.

• THQ has a diverse group of development studios and a strong licensing operation, but no strong franchises in-house.

• Midway has several well-known franchises, most notably "Mortal Kombat," but has been consistently unprofitable for the past several years.

• British company Eidos seems well positioned to be bought since it's relatively small but owns the popular "Tomb Raider" series. However, recent acquisition talks with several unnamed suitors fell apart. Time Warner already owns a 10% stake in Eidos.

While many independent companies are still finding their way into the vidgame biz through downloadable or Web-based games, even Take-Two's leadership thinks the days of independent companies of its size may be numbered.

"There are two times when consolidation typically occurs: when an industry is growing rapidly or declining," says executive chairman Strauss Zelnick. "We're growing, and so I believe we'll see continued consolidation."