In his latest research note to investors, Wedbush Morgan Securities analyst Michael Pachter has taken an in-depth look at the variables involved in Electronic Arts' proposal to purchase Take-Two Interactive, and why ultimately the leading third-party publisher will win.

Although Take-Two balked at EA's offer, saying it "undervalues" their franchises and talent, Pachter believes that no other public company is likely to make Take-Two an offer greater than the proposed $2 billion.

Below we have reprinted (in part) Pachter's breakdown on why EA will get its way and how it will happen.

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Why EA Will Win
In its SEC filing on February 15, Take-Two's board adopted an amended by law that provides that nominations for the Take-Two board of directors must be submitted by February 25. We believe that EA will keep its options open, and will nominate a slate of directors to be approved by shareholders at Take-Two's annual meeting, expected some time before June 30. In our view, EA has likely purchased some Take-Two stock on the open market, and we believe that EA management is speaking with Take-Two investors this week to convince them that the EA offer is a fair one.

It is likely that Take-Two has a poison pill that could obviate a hostile takeover. If EA chooses to make a hostile bid, it would therefore likely be prevented from succeeding. However, we think that the EA offer presents a value far above the likely second place offer, and do not believe that a second offer will materialize.

EA has the advantage of a strategic reason (sports) for purchasing Take-Two. No other party has the same advantage, and the acquisition of Take-Two makes another purchaser subject to head-to-head competition with EA. No other party can pay as much as EA, and should another bidder enter the fray, they would subject themselves to potential "buyer's remorse" if they bid too high and EA withdraws from the bidding. We don't see this happening.

Of course, shareholders can take the assurance of Take-Two management to heart that it will work diligently to build value. However, based upon the closing price last Friday, shareholders apparently weren't convinced of this potential until the EA offer surfaced. Should EA withdraw its offer, we think that Take-Two shares will decline in value dramatically, probably to $20 or so (factoring in a premium for the potential that EA's bid will resurface.

Why EA Will Walk
EA has no real choice other than to withdraw its bid if shareholders do not accept $26/share. We think that the company may choose to offer a small increase, perhaps $1 – 2/share more, in order to complete a friendly takeover. However, we don't see the company dramatically increasing its bid over the near term. In the absence of a hostile bid, we think that EA will cool its heels and walk.

We think that the real urgency of the EA bid is to avoid competition from Take-Two sports titles scheduled for release later in the year. By our math, each year that the companies compete in sports costs EA $150 million in operating profit. If Take-Two shareholders do not accept an EA bid and close the transaction before Take-Two releases its fall sports lineup, EA will have lost $150 million in opportunity cost. Thus, the clock is ticking. If the offer appears unacceptable to shareholders, we think EA will withdraw it, and we expect EA to compete more aggressively in sports, by cutting price dramatically. By our reckoning, EA could cut pricing on its basketball and hockey games by as much as $30, incurring pain, but causing Take-Two's operating profits to be halved for the fiscal year. We think that such a strategy will force Take-Two back to the bargaining table.

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