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.

Can you believe the drama going on between Electronic Arts (NASDAQ: ERTS) and Take-Two Interactive (NASDAQ: TTWO) has dragged on for this long? I can't. According to this article, EA has let its current bid expire and intends on checking out additional stats behind the company in an effort to think more about what Take-Two has to offer and what its true value might be. The company behind the Grand Theft Auto series of mature-rated games is offering to give EA a presentation that includes non-public data.

EA really wants this deal. So does Take-Two. EA believes that it needs a super-franchise that goes beyond its sports dominance, and it feels that Grand Theft Auto would be one heck of an asset to own. It's true. EA would probably benefit from the title, and it might get the company's stock out of its current doldrums. And in a world where Activision Blizzard (NASDAQ: ATVI) is benefiting greatly from an acquisition and a merger -- Guitar Hero and Vivendi Games, respectively -- one cannot blame EA, I suppose, for keeping the dream alive.

EA is in something of a bad spot because, at this point, it probably will have to raise the bid on Take-Two. I think the market will ultimately be disappointed if EA doesn't get Grand Theft Auto (and BioShock, for that matter). It will be perceived as a failure on management's part, and shareholders will wonder where the growth will be coming from, and what catalysts can be counted on to drive the stock price higher in this tough economic environment.

Take-Two Interactive (NASDAQ: TTWO) has launched its important new "Grand Theft Auto IV" franchise and it has done remarkably well. It did not cause a big bump in the firm's stock, which has only moved from $26.62 three weeks ago to $27.10.

The company's one suitor, Electronic Arts (NASDAQ: ERTS), had already taken the shares up from from under $18 with its buyout offer. Most analysts believe that the offer will be extended because Take-Two has resisted a buyout.

According to The Wall Street Journal, there is a "belief among Take-Two management and some of the company's shareholders that the company deserves a higher offer from EA. "

No matter what Take-Two believes, EA's best move now is probably not to extend the offer but, instead, to walk away. The Take-Two share price would be very likely to move back below $20, which would pressure the company's board to do something to move the share price back up again.

EA's shareholders are ill-served if the company extends its offer. Without a buyer, Take-Two might have to come to the negotiating table and Electronic Arts could get a better deal.

Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 letter.

I decided to sell my position in Take-Two Interactive (NASDAQ: TTWO) today. I obviously wanted to take advantage of the nice jump in the share price following the buzz over the all-cash offer from Electronic Arts (NASDAQ: ERTS). As I write this, Take-Two's stock is up 52% from its previous closing value, and up somewhere around 29% from the price I paid near the end of 2007 for the stubs that I just dumped.

My reasoning is simple. I purchased Take-Two ahead of the expected stock appreciation that would occur in the months preceding the Grand Theft Auto IV release in April. Also, I felt that the company was improving and moving beyond the problems it experienced with corporate governance issues in the recent past. Well, with the significant move in the value of my shares in a relatively short period of time, and with the uncertainty regarding this deal, I decided to take the money and see if the funds might be better invested elsewhere. I don't necessarily want to be in the middle of a takeover battle; I'm sure shareholders of Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) aren't the most content investors on earth right now.

Do I think Take-Two might be able to negotiate a better offer? Yes, I do. But I own Activision (NASDAQ: ATVI), and I am satisfied with playing the videogame sector via its shares for now. And I can always look at Take-Two after things settle. I believe selling Take-Two was the right decision for my portfolio.

Disclosure: I sold my entire position of Take-Two shortly before writing this, and I own shares in Activision.

Shares in Take Two (NASDAQ:TTWO) fell almost 3% after hours and could do worse at the open. The company offered such weak guidance that investors are trying to find out what killed the firm's big turnaround.

Net revenue for the fourth quarter was $292.6 million, compared to $266.6 million for the same period of fiscal 2006, which was in line with expectations. Net loss for the fourth quarter was $7.1 million or $0.10 per share, compared to a net loss of $14.0 million or $0.20 per share in the fourth quarter of fiscal 2006. Revenue in the quarter was driven by by BioShock, NBA 2K8 and Carnival Games, all of which were new titles released last quarter, as well as Grand Theft Auto catalog titles.

But, the company's next quarter will be much worse than expected. Barron's reports that "for the fiscal first quarter ending January 31, the company sees revenue of $175 million to $225 million, with a non-GAAP loss of 50-60 cents a share. The Street has been looking for $278 million and a loss of 16 cents."

After years of accounting problems and management turnover new investors brought in a top management team to fix the company. It seemed to be working, at least until today. The shares traded just above $12 in August, but signs that things were improving moved the stock to over $19 in early October. After hours today, the price dropped to $17.55.

Take Two is not likely to move up for at least a quarter, and if guidance is light then shareholders may lose what patience they have left.

Douglas A. McIntyre is an editor at 247wallst.com.

Take-Two Interactive Software, Inc. (NASDAQ: TTWO) did not lose as much money for its latest quarter, according to results the company release yesterday evening. Take-Two, the game publisher known for being a staunch defender of graphically violent and disturbing games in the "Grand Theft Auto" series, said that game titles such as "The Darkness" and one based on the newer "Fantastic Four" movie help drive results to a not-as-large-as-expected loss.

The software publisher's net loss for the third-quarter period was $58.5 million ($0.81 per share), which paled in comparison to the year-ago loss of $91.4 million ($1.29 per share). But, with its recently completed Q3 period being the seventh straight with a loss, what are TTWO investors to do? Continue waiting for some kind of turnaround?

In standard, idiotic Wall Street fashion, the company's shares made a gain of 5% after the Q3 results were announced, probably since the loss was less than expected. I'm not sure seven straight quarterly losses would make me bid up the stock -- you? Take-Two did say 2008 earnings would exceed Wall Street estimates, so perhaps that was priced into the uptick.

The release of "Grand Theft Auto IV" in Q4 may give the company the profit boost is desperately needs. Although the publisher has a new management team after years of legal wrangles based on corporate misdeeds and consumer lawsuits, it still has not righted itself -- maybe time is all the company needs. But, how much is too much?

Hot Topic Inc (NASDAQ: HOTT), the trendy retailer with a downward trending stock price, announced last night that it is buying back $40 million of stock, roughly 11% of the company's value.

As we blogged in early July, the retailer is way off from its $30 high and is now selling for $8.15. The sagging stock price has attracted SAC Capital, which accumulated 5.1% of Hot Topic stock, or 2.3 million shares.

We blogged about the merits of bottom fishing in this retailer, but proved a bit early as investors dumped retail stocks on weak economic data and concerns about the subprime market hit the headlines. Hot Topic also got hit due to Take-Two Interactive Software Inc (NASDAQ: TTWO) delaying the launch of Grand Theft Auto 4, as the introduction of new game consoles is thought to have boosted Hot Topic's results in the past.

Hot Topic has a clean balance sheet and a second concept, Torrid, which provides plus-size fashion-forward apparel and accessories that target young women principally between the ages of 15 and 29, that is doing alright.

Last night's announcement can be credited to SAC Capital. SAC likes the management of overcapitalized balance sheet to put any excess money to work quickly. The combination of a large share repurchase in addition to a potential turn around of the Hot Topic concept could drive this stock considerably higher in 2008.

Historically, the Electronic Entertainment Expo, or E3, had been a model of industry excess. But after last year's extravaganza it was announced that the expo would be restructured due to the high costs it imposed on the computer and video game companies involved in the technological bacchanalian. The large trade show that boasted a draw of 60,000 attendees has since been eliminated and replaced with a invitation-only business summit format. Now the new Electronic Entertainment Expo, being held in Santa Monica from July 11 through July 13, will have less fanfare. But will it still hold the same prominent position in the industry? That remains to be seen.

The players are all still here -- Microsoft Corporation (NASDAQ: MSFT), Sony Corporation (NYSE: SNE), Nintendo Ltd (OTC: NTDOY), as well as the top-notch game makers. But their announcements are unlikely to top those of recent years past, due to the point at which we are in the product cycle -- not due to the change in the event's format. There will be no new groundbreaking console announcements this year, but there will still be plenty items of note, and E3 will still be the platform of choice to announce them. The most important news to listen for: What will the industry players be selling this holiday season? Will they announce must-own games, or better yet, games that will push consumers to buy new consoles?

Some rumors for the various consoles include Mario Kart and Super Mario Galaxy being shown for the Wii; Grand Theft Auto IV and Metal Gear Solid 4 shown for the PlayStation 3; Halo Wars, Fable 2 and Grand Theft Auto IV being shown for the Xbox 360, with Gears of War 2 and 3 and Dead Rising 2 being announced. How many of these will come true? Who knows, but it will be an interesting week.

Check back again for an E3 recap after the dust settles.

MAJOR PAPERS:

• The Wall Street Journal reported that Toyota Motor Corporation (NYSE: TM), which launched a factory-building blitz five years ago, is now being urged by senior members of the founding family to stop building factories in the United States on fears it will hurt the company's efficiency.
• Kirk Kerkorian, who controls MGM Mirage (NYSE: MGM), had planned to buy the Bellagio Hotel and Casino and the $7.4B Project City Center from MGM. But that deal now appears to be off, according to the Wall Street Journal.

OTHER PAPERS:

• The U.K. Times reported that News Corporation (NYSE: NWS) has had preliminary talks with Yahoo Inc (NASDAQ: YHOO) about giving its social networking site MySpace to the online search company, in exchange for a 25% stake in Yahoo!.
• The New York Times reported that NYC Mayor Michael Bloomberg will leave the Republican Party and register as an Independent.
• The New York Times also reported that Microsoft Corporation (NASDAQ: MSFT) will pay Take-Two Interactive Software (NASDAQ: TTWO) $50M for two exclusive downloadable episodes of Grand Theft Auto for the Xbox 360.

Update, 5/11: In the wake of this controversy, Linden Labs has purged Second Life of those responsible for the behavior described below. Kudos to them.

More than six million people worldwide have found a way to live a second, more fulfilling life online in the virtual world of Second Life. Now some of the same seamy behavior that bedevils the real world is showing up in that world as well.

Now, according to The Guardian (registration required), German prosecutors are investigating virtual pedophilia, in Second Life, as some players have taken to engaging child prostitute characters in sex within the virtual world. Sex with e-animals, they write, is also increasingly popular.

The issue of legality in the U.S. of such activities was muddied in 2002 when the Supreme Court, in Ashcroft vs. Free Speech Coalition, struck down a law prohibiting the sale and distribution of virtual child porn as a violation of First Amendment rights, as long as the porn is not based on a real child.

The issue of illegal and/or immoral behavior of avatars in video games such as Linden Lab's Second Life came to public dialog with the release of Grand Theft Auto III in 2001, in which a player can steal a car, pick up a hooker, have sex with her, then kill her and steal her money.

A number of related cases are working their way through the court system today, one or more of which may eventually establish the boundaries for this and other virtual content.

At the moment, however, I suspect the question will be, what will the public tolerate? Certainly, a child e-porn scandal will invigorate a great deal of opposition to unchecked virtual privileges. The controversy presents a huge challenge to Linden Lab's franchise game.

The SEC's informal investigation of Take-Two Interactive Software, Inc. (NASDAQ: TTWO) has gone formal. This comes after years of controversy surrounding the company including allegations of overstated earnings, options backdating, hidden porn in the company's Grand Theft Auto video game, and the current battle for control of the company. The formal investigation will, according to Herb Greenberg, give the SEC "carte blanche to subpoena anybody and everybody."

Interestingly, the stock didn't respond strongly to the news, perhaps a reflection of the changes in management that have occurred -- the market realizes there were massive governance problems, and expects the new management to clean things up. Still though, given the controversy and need for change, the shares don't look particularly cheap to me.

For more on my take on the situation at Take Two, read this piece from April 2.

Electronic Arts (NASDAQ:ERTS) reports earnings today after the close of the market. Consensus estimates are $0.02 for EPS and $672.25 million in revenues. In August the company forecast a loss of -$0.22 to -$0.28 after items and a break-even result before items on revenues of $635 million to $685 million.

This will essentially be the second throw-away quarter for EA as the bulk of the business is centered around the fourth quarter and first quarter of the calendar. Its updated "Madden Football" game posted sales of more than $100 million its first week out of the chute in August.

So this is the throw-away quarter, and that is a given. Now what we have to worry about is the excessively wide range of estimates that exists for the coming quarter. The street is looking for approximately $0.57 EPS and $1.2 Billion, but the lower and higher ranges are apparently $0.40-0.72 and $1.15B to $1.3B. There is also a discrepancy of consensus estimates from service to service. That means that with the stock back up at the highs, you might have to still worry even if they guide slightly up from mid-points. The other worry is that the company has a history of reporting sporadic results and even more sporadic reactions in stock prices.

With the large Madden numbers you would expect that the revenues were attainable. But in this current quarter we get the release of the two new systems going after Xbox 360's lead. We have the Nintendo Wii and the Sony PS3 coming out within days of each other later this month. Both consoles have sold out as far as pre-orders at GameStop and indications seem to suggest some of the same at Best Buy. EA has roughly 30 games under development as of last month. This is actually the second quarter that JamDat has been a subsidiary of the company for mobile operations, so we may have a better grasp of the mobile gaming segment ahead.