I was a little surprised when I heard that the deal between Electronic Arts (NASDAQ: ERTS) and Take-Two Interactive (NASDAQ: TTWO) was called off. Yes, I had my doubts, but I thought that in the end, EA might raise its offer so that it could get its corporate paws on the Grand Theft Auto franchise. EA has been looking for ways to grow in a world where Activision Blizzard (NASDAQ: ATVI) is making waves with Guitar Hero and World of Warcraft. That company's stock has done well over the past year, while EA's has suffered.
EA may be walking away for now, but I'm not sure this is the last that we'll be hearing of Take-Two being in arbitrage play. Management clearly wants to sell the publisher. Thing is, it should have simply taken the offer it received earlier in the year. Now, shareholders will have to wait for another bid. Who knows when that will be, considering that it's been reported that software sales may be heading for a slowdown (I'm sure EA must have taken this into consideration when leaving the table).
But what does this mean for video-game investors? I believe investors should put Take-Two on a watch list and pray for the publisher's shares to drift down toward the 52-week low. I would not take a chance on the stock at these levels. Ideally, I would love to see Take-Two trading below $10 per share before buying. Right now the 52-week low is $13.53. Getting to single digits might be wishful thinking, but you never know the way this market is behaving. And considering that management passed up what was most likely a decent offer in the first place, one has to wonder if Wall Street might be in a punishing mood.
No matter what, Take-Two will be bought out. And if one could get in at a very low price, then the speculative risk/reward scenario might be attractive. EA might come back at some point, too. In fact, I expect the company to, although that is purely my own educated guess. I continue to own ATVI as my video-game play, but will be keeping my eye on Take-Two and its price action.
Disclosure: I own Activision Blizzard; positions can change at any time.