Why Take-Two Will Accept EA's Bid
Take-Two doesn't really have any other options. If a second bidder doesn't surface (we think a second bid is extremely unlikely), Take-Two has no real leverage. We don't think it is credible for management to ask shareholders to trust them to grow the business and earnings to the point where a $26 share price is warranted at today's multiples. We base this assessment on the EV/adjusted net income multiples for EA (around 12x FY:11 adjusted net income, implying around 17x the discounted present value), Activision
(around 22x FY:08 adjusted net income, with price support from the pending Vivendi tender), THQ (around 10x consensus FY:09 adjusted net income), and Ubisoft (around 25x consensus FY:09 adjusted net income). The average of these "peers" is a forward multiple of 18.5x, so if we were to value TTWO at the peer average, the company would have to demonstrate after-tax net income earnings power of $1.40/share. This figure reflects EPS growth of around 35% above the implied $1.05 after-tax EPS suggested by the high end of company guidance for the year, and requires significantly more "turnaround" than management has committed to thus far.

Why Shareholders Should Accept EA's Offer
We think that EA has two choices: beat 'em or join 'em. They are attempting to offer a conciliatory gesture first, preferring to avoid the pain of a price war in sports without at least trying to acquire Take-Two. Should shareholders reject EA's offer, we expect the offer to be withdrawn, and expect to see EA compete aggressively and attempt to limit Take-Two's profit potential from its sports business. If this occurs, we think that the $1.50 pro forma pre-tax EPS guidance could well slip to something below $1.00 per share.

Next, we think that EA will ultimately seek to disrupt continuity of the Grand Theft Auto franchise by attempting to engage the Housers and key Rockstar personnel upon the expiration of their contracts in February 2009. Should EA not complete an acquisition in time to eliminate duplication and competition in its sports business, its next best alternative is to try to "hire" key Rockstar personnel and engage them in creating an open world, mature-themed game to compete directly with Grand Theft Auto. This strategy has been successfully implemented by Activision through its recruitment of both the Infinity Ward and Spark Unlimited teams, and the ultimate development of the Call of Duty franchise. We expect to see EA (or another publisher, such as Activision) attempt the same thing with the creators of Grand Theft Auto.

In our view, the Rockstar North team is as valuable as any studio in the video game business. After the price paid for Pandemic and BioWare (around $860 million), the Rockstar North team must at least consider testing the market value of their future services. We think that both EA and Activision will be interested in attracting talent such as this, and think that both companies' managements would be derelict in their duty if they failed to pursue the best in the business when their contracts expire. We envision that EA will withdraw its offer if not accepted, and likely will resurface with a lower offer at some point later in the year. In the meantime, we expect the company to prepare for battle, and we don't see Take-Two winning any prospective battle.