Brain Drain Could Sour Take-Two Deal

The culture-clash could be more than what EA can handle. EA only needs to look into history to see how acquisition of studios can go wrong.

Consider UK-based game developer Rare. In 2002, Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) paid about $375 million for Rare, a studio with an outsized reputation for churning out hits such as Perfect Dark, Banjo-Kazooie and GoldenEye 007.

But after the acquisition, the creative talent streamed out of Rare and the studio never regained its glory. Last year Tim and Chris Stamper, the co-founders of the studio, left the company.

"A lot of people consider the buy a disaster," says Satterfield. "Microsoft bought Rare but they couldn't buy the people, which shows with such purchases you can only sometimes get the IP."

If EA wants to avoid that fate, it will have to pay a steep price. Keeping on the Houser brothers won't be cheap.

The Rockstar management contract is scheduled for re-negotiation in 2009 and so far, their compensation may have rivaled that of Take-Two's last few CEOs.

The Rockstar contract includes a significant royalty payment, a big portion of which goes to the division's management, says Doug Creutz, an analyst with Cowen & Co.

Creutz estimates that the internal royalty payment (distributed among all of Take-Two studios but a majority of which goes to Rockstar) was $115.9 million in fiscal 2008, up significantly from $29.7 million the year before and more than the peak of $87.9 million in fiscal 2005, when the last Grand Theft Auto title was launched.

Eventually, EA's Riccitiello said in a recent conference call with analysts that he hopes his relationship with Sam Houser and his interactions with Take-Two's creative teams in the past could come in handy when it comes to retaining Rockstar talent. He declined to elaborate on that relationship, saying it was too early to discuss.

Staying on with EA could help the Housers too. "EA doesn't have the best reputation for games and managing studios but they do have a good reputation for maximizing the potential of a game," says Jesse Divnich, an analyst with The simExchange, an online virtual fantasy stock market for video games.

Under Riccitiello's regime, and with the recent reorganization of EA, studios have more freedom than ever.

EA has the monetary resources, the marketing capability and the global reach that could make a game like Grand Theft Auto even bigger than it has in the past. "They have everything a developer would want in a publisher," says Divnich.

Shares of EA closed up 79 cents, or 1.7%, to $47.93 Tuesday. Take-Two fell 4 cents to $26.85 after soaring nearly 55% Monday following EA's $2 billion, or $26 a share, offer for the company. EA made its bid for Take-Two public after the latter's board rejected its offer twice.

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