Thanks to Grand Theft Auto, PS3 and Xbox 360 are shifting into overdrive to sell more gaming machines. Courtesy of Take-Two

By Yi-Wyn Yen

Wall Street analysts predicts Grand Theft Auto IV will easily break video game sales records this week. But one question remains: Will fans buy the game for Sony’s PlayStation 3 or Microsoft’s Xbox 360?

Both Sony (SNE) and Microsoft (MSFT) are in a heated race to win over undecided gamers who must buy one of the two consoles to play the biggest game to be released this year. The popular franchise, from Take-Two Interactive (TTWO), is expected to surpass first-week sales of $400 million, which would top Halo 3’s record of $300 million, according to Evan Wilson, an analyst with Pacific Crest Securities. “Grand Theft Auto is clearly going to be a blockbuster game,” Wilson says.

GTA IV launches Tuesday, which should result in a big boost in monthly console sales for Sony and Microsoft. Both are a distant second to market leader Nintendo with its family-friendly Wii. Nintendo, which does not offer GTA IV, sold 721,00 Wiis in the United States in March, according to market research firm NPD. The Wii sold more than the PS3 — 257,000 units — and the Xbox — 262,000 console — combined. Analysts anticipate first-week sales of about six million copies for GTA IV, which retails for $60 or $90 for a special edition.

“It’s interesting that both Sony and Microsoft are spending a lot of money to align the game with their console,” says Sam Kennedy, the editorial director for gaming publication, 1 Up Network.

Neither Microsoft nor Sony will disclose how much they have spent to promote the game, though both were quick to promote their gaming machines as the best option for GTA IV fans. The Xbox 360, with a 20 gigabyte hard drive retails for $350 while the PS3, which features Blu-ray and twice the hard drive capacity, retails for $399.

“Grand Theft Auto is a premier brand that was really established on the PlayStation platform,” says Peter Dille, senior vice president for Sony’s PlayStation Network. “Guys who love the game grew up on PlayStation. We think that they’ll vote with their wallets for the PS3.”

The GTA franchise has sold more than 65 million copies worldwide in the last 11 years. Of the previous installments, only one was made available for the Xbox platform while all the games were playable on Playstations.

A Microsoft representative says gamers will side with the Xbox because Rockstar Games, the Take-Two game studio that developed GTA IV, is making exclusive add-ons for the console.

Rockstar will release two additional game plays for those who can’t get enough of the drug trade adventures of GTA hero Niko Bellic. The first will be made availabe this fall for the Xbox. “We absolutely believe having exclusive content will boost sales,” says Xbox spokesman David Dennis. “The Grand Theft Auto franchise may have been home to the PS2, but we believe PlayStation owners will stand up and upgrade to the Xbox for [GTA IV].”

Dennis says major retailers in Europe have informed Microsoft’s sales team that GTA pre-orders favored the Xbox over PS3 by 2 to 1. He argues that this is a “strong indication” that more gamers will purchase the Xbox for the month of April.

Other Xbox perks, like Xbox Live and online rewards for top gamers, will attract console converts, he contends. “The PS2 and PS3 has an online network that’s in the low single digits. Make sure you put that number next to ours,” Dennis says. PlayStation’s online network has 3.7 million users, and Xbox Live has more than 10 million.

PlayStation’s Dille was just as quick to diss the Xbox. “Microsoft had its moment with Halo, and that moment has past,” he says. “Sure they’re touting Grand Theft Auto, but you can play it on our platform too. You want to talk about exclusive content? Sony has a very deep lineup of exclusive games like Metal Gear Solid and Grand Turismo that has the industry buzzing. The PS3 has a more exciting story going on this year.”

The two rivals can continue to throw pot shots at each other until May 15, when NPD will name a console leader for April sales in the U.S. Consumers should be happy either way. GTA IV has received fierce reviews in the gaming community. “It’s quite an amazing experience,” Kennedy says. “I can’t imagine any game being bigger this year.”

By Yi-Wyn Yen

Watching the latest saga between video game publishers Electronic Arts and Take-Two is like witnessing two rival tennis pros throw flowers at one another.

On Friday, EA (ERTS) and Take-Two (TTWO) engaged in a press release battle that did not bring them any closer to reaching a deal.

EA extended its $2 billion tender offer to purchase the maker of the highly-anticipated Grand Theft Auto IV by 30 days. Though the all-cash bid remains the same, EA lowered its per-share price to $25.74 from $26 to reflect a dilution of additional shares that will go to Take-Two’s management. Take-Two closed at $25.98 on Friday.

EA’s deadline for Take-Two shareholders to accept the offer was originally set to expire at midnight Friday, but so far the gaming giant has won just 8% of the total shares it needs. In a statement, EA said it “continues to believe that the offer price is full and fair.”

Shortly after, Take-Two retaliated by firing off its own release. The company’s chairman, Strauss Zelnick, called the 6.4 million shares that were tendered “minuscule.” On Thursday evening at the annual shareholder meeting, Take-Two shareholders backed a proposal to give ZelnickMedia, the consulting firm that manages Take-Two, 1.5 million shares in restricted stock. Zelnick said that was “indisputable evidence” that its stockholders think its share value is “superior to the EA offer.”

EA has argued that the vote to back Take-Two’s management does not reflect the majority of Take-Two’s shareholders because they weren’t eligible to vote. Only those who held the stock prior to Feb. 19 were allowed to attend the meeting. Analysts estimate that between 50% to 70% of Take-Two’s stock has been sold since EA went public with its takeover bid on Feb. 24. An EA spokesman likened rewarding ZelnickMedia, which is expected to get a windfall if the company gets sold, to “having your last employer give you a million dollar bonus that your new boss is forced to pay.”

Take-Two refuses to talk with EA until after April 30, the day after GTA IV launches. Analysts expect the company will sell roughly 15 million to 20 million copies through 2009. Take-Two’s board unanimously rejected EA’s offer because it was “highly opportunistic and poorly timed” to get the most out of GTA, Strauss said at the shareholder meeting.

The alternative for EA is to simply walk away from the deal. But analysts say that is an unlikely scenario. They still anticipate the deal to go through, though at a slightly higher share price between $26 to 28. Take-Two shareholders have until May 16 to consider the tender offer.

By Yi-Wyn Yen

When it comes to this spring’s crop of hostile takeovers, none has become more strange and complicated than Electronic Arts’s attempt to buy smaller, rival game publisher Take-Two for $2 billion.

On Thursday evening, Take-Two (TTWO), which makes the popular Grand Theft Auto series, will hold its annual shareholder meeting at the W Hotel in New York City. One proposal on the table: giving management 1.5 million shares of restricted stock, which would be worth tens of millions of dollars in the event of a buyout. If ZelnickMedia, the firm that has been managing Take-Two since shareholders voted out the previous executives at the last annual meeting, wins approval of that management incentive, the value of Take-Two shares will be diluted by 26 cents, putting in jeopardy EA’s (ERTS) offer of $26 a share.

In a bizarre twist, EA says that the majority of Take-Two’s current shareholders will be excluded from the meeting. Take-Two will only allows those who held the stock prior to Feb. 19 to attend the meeting, which means even those who no longer own shares in the stock can determine the fate of those who do. Analysts estimate that between 50% to 70% of Take-Two’s stock has been sold since EA went public to buy the company in an all-cash deal on Feb. 24.

“The sell-off has created a situation where former shareholders will vote on a management compensation amendment which could significantly impact new shareholders - and the new shareholders are not eligible to vote,” an EA spokesman said in a statement. “It’s like having your last employer give you a million dollar bonus that your new boss is forced to pay.”

Whatever the outcome of the shareholder meeting, EA’s deadline for Take-Two investors to accept the deal ends on Friday at midnight eastern time. EA has no immediate plans to raise its all-cash offer, which Take-Two’s management has rejected as too low. Take-Two’s chairman, Strauss Zelnick has stated that the company will not entertain buyout offers until April 30, the day after the release of Grand Theft Auto IV, which is expected to be one of the biggest hit games this year. “The EA proposal failed to value Take-Two’s extensive portfolio of top-selling brands and our extraordinary creative and human assets,” Zelnick said on last month’s earning call.

Analysts have watched the drama unfold with earnest. “I have been covering M&As for 20 years, and this is by far the weirdest thing I’ve ever seen,” says Michael Pachter, a gaming analyst with Wedbush Morgan Securities. “The timing is odd. The way the events have proceeded has been odd. The fact that so many shareholders have bailed is odd. It’s unusual how belligerent the two managements have become. Take-Two thinks it’s worth more after Grand Theft Auto comes out. EA thinks the company is worth less before it comes out. They’re both wrong. The company is worth the same. So the thinking is a bit odd too.”

Along with a possible change in investor sentiment, EA also faces anti-trust concerns. On Thursday morning, EA received its second request from the Federal Trade Commission to file more details of its proposed deal. Both EA, with its Madden Football series, and Take-Two, with its 2K Sports franchise, offer competing sports video game titles. “Worst case, a combined co. would be forced to divest certain assets/franchises, but we see even that as unlikely,” writes UBS analyst Ben Schachter in a report.

Though much uncertainty remains, many analysts believe an acquisition is at hand. “The news does little to change our view that ERTS will be able to buy TTWO in the $26-$28 range,” Schachter wrote. “We still see ERTS as the best acquirer of TTWO in terms of potential synergies and the most likely to win it, w/price remaining the only issue.”

By Yi-Wyn Yen

Electronic Arts announced Monday that chief financial officer Warren Jenson is resigning as the video game publisher presses a hostile bid to buy rival Take-Two.

Jenson, who has been the CFO since June 2002, will leave the company in September. EA did not specify a reason for Jenson’s departure and said it will name his replacement “shortly.”

Analysts say the shakeup is not surprising. Chief executive John Riccitiello has made a number of key management moves since he joined the video gaming powerhouse last April. Riccitiello’s latest came last week when he hired a new right-hand man in president and chief operating officer John Pleasant.

“Riccitiello was brought in because the stock hadn’t moved in three years,” said Michael Pachter, a gaming analyst with Wedbush Morgan. “Now it’s been four years. To help him, he’s hiring people he’s comfortable with. If you hire a new coach and the team’s not winning, the coach is going to bring in new players.”

Jenson, 50, spent three years as the CFO of Amazon (AMZN) before joining EA (ERTS), and has also held that position at Delta Airlines and NBC Universal.

The timing of Jenson’s resignation indicates that the company’s plans for a new CFO are unrelated to its $1.9 billion bid to acquire Take-Two. A source who has spoken to a high-level EA executive says that the company has already chosen a successor to Jenson.

In a note to clients, UBS analyst Ben Schachter wrote, “We envision little impact to the company’s strategy on the deal going forward. We think CEO John Riccitiello is the driving force behind this deal, though the timing here is unnerving and will likely raise questions with investors.”

Take-Two (TTWO) management has rejected EA’s offer of $26 a share is too low. EA has taken its case directly to Take-Two’s shareholders, and is giving them until April 11, one day after the annual shareholder’s meeting, to aceept the offer. Take-Two’s board has urged shareholders to hold off until it reviews the offer and informs them of its decision by March 27.

By Yi-Wyn Yen

Its $1.9 billion bid to buy rival Take-Two (TTWO) having been rejected by management, video game giant Electronic Arts took its case directly to the shareholders Thursday morning.

At stake is the future of Grand Theft Auto, a relentlessly violent action-adventure that has grown into one of the most valuable video game franchises in the business. Earlier this week, Take-Two raised its sales estimates for the current quarter to $400-$500 million, based on pre-orders for the next version of the game, Grand Theft Auto IV, due out April 29.

With the new release just weeks away, EA (ERTS) wants to close a deal quickly. The company has been on a buying spree of late to replace its own aging franchises — such as the Madden Football series. It is offering Take-Two shareholders the same $26 a share that the company’s management had already turned down. Its offer is set to expire on April 11, the day after the Take-Two’s annual shareholder’s meeting — putting maximum pressure on the company’s leadership.

Take-Two executives have repeatedly said that $26 a share is too low, but their shareholders may disagree. Take-Two’s two biggest, Oppenheimer and Fidelity, have sold a significant portion of their shares for less, it was revealed earlier this week. Oppenheimer has cut 50% of its holdings to 8.8 million shares and now has an 11.5% stake in the company. Fidelity’s stake is now down to 2.75% from 14.7%.

“EA may have offered more if Take-Two had come to the negotiating table,” said Colin Sebastian, a gaming analyst with Lazard Capital Markets. “But there was no bidding war going on. EA thinks shareholders may be more favorable to the deal.”

“This is a great opportunity for Take-Two shareholders,” said EA chief executive John Riccitiello in a statement. “We believe Take-Two investors will see our tender offer as the best way to maximize the value of their investment.”

Shortly after, Take-Two urged shareholders to “take no action.” Take-Two’s board said it would review the offer and instruct shareholders of its decision within 10 days.