In the wake of EA's decision to walk away from Take-Two, we now must wonder what's next for the publisher behind GTA. Ultimately, Wedbush Morgan analyst Michael Pachter believes Take-Two's management "overplayed its hand" with EA, and while Take-Two has been in talks with other companies, Pachter just doesn't see the same kind of synergy with others as the publisher would have had with EA.

"In our view, Take-Two's fundamental valuation does not support a current offer at a price higher than EA was willing to pay. We believe that the true fundamental value of the company is around $16/share, and synergies can be achieved only through a combination with a company with an already sizeable presence in the video game sector. We do not believe that either Activision or Ubisoft (the only other independent publishers large enough to consider a merger with Take-Two) can achieve the synergies that could have been achieved by EA, given each company's absence from the sports sector. For different reasons, we do not believe that either company is particularly well-positioned to complete a merger with Take-Two in the next 12 months," he said.

As such, Pachter thinks Take-Two is now intent on remaining an independent company, but it will soon face a tough challenge: retaining the creative forces behind the blockbuster GTA franchise.

"In trying to calculate the sustainable earnings, we must address the risk of losing key talent. Following a protracted negotiation, Take-Two signed Sam and Dan Houser to a three-year contract in February 2006. The brothers are the driving force behind the Grand Theft Auto series, and are intimately involved in game decisions. While neither writes game code, we believe that they are analogous to the director of a Hollywood film, instrumental in determining the final shape of the ultimate games released. We expect a bidding war for the Housers' services in February 2009, and remain convinced that Take-Two faces two equally unpalatable options: either lose the Housers to another bidder, or pay more to retain them," Pachter commented.

He continued, "The outcome will be leveraging, and the impact is likely to be negative. Should the Housers depart to Activision, Ubisoft, or even to EA, we think that Take-Two will suffer lower future sales of its GTA games. We draw an analogy to EA's Medal of Honor brand, which saw sales decline by over 40% following the departure of key members of its development teams in 2003. Those teams produced Activision's Call of Duty franchise, which has consistently outsold Medal of Honor since the departure. In our view, the loss of the Housers could trigger a similar result, with a competing brand threatening future GTA sales. On the other hand, should the Housers remain at Take-Two, the price of making future Grand Theft Auto games will go up; we estimate that the current 'internal royalty' paid on the game is approximately 15% of sales, and expect negotiations for retention to commence at a 20% royalty rate. That would impair the company's bottom line results in future years; for example, had the 'internal royalty' been 5% higher in FY:08, operating profits would have been lower by $32 million (5% x $640 million in revenue), or around $0.40/share."