Take-Two Activists Give Game a Bad Name

From March 29, 2007 (the date of the shareholder meeting at which the dissidents took control of Take-Two's board and management team) to Feb. 22, 2008 (days before the E.A. offer went public), Take-Two's stock returned -20.66% vs. -4.41% for EA, which about the same as the S&P over that time.

What's worse, however, is that they've given all activist investors a black eye with how they've paid themselves.

As mentioned, the Electronic Arts offer went public on Feb. 24th at $26 a share. That followed a previous, private offer from E.A. at $25 a share in early February. A week later, on February 14th, the Take-Two board approved a much higher compensation plan for ZelnickMedia (for the second time since the original employment contract was struck in March 2007). This time, ZelnickMedia gets additional stock grants worth $20 million at the current offer price if there's a change in control. Additionally, the three Zelnick executives who serve on the Take-Two management team get $208,333 a month (or $833,332 per executive per annum) and the potential annual bonus was raised 233% to $2.5 million.

ZelnickMedia's response to critics who say A) this pay package is outsized given the company's returns and B) is opportunistic given what they knew E.A. was contemplating is that they have been working much more at Take-Two than originally planned. Strauss Zelnick said they thought it was only a six-month engagement when they took it on. Curious then that the original terms of employment for Zelnick Media approved by the board specified an annual bonus.

Zelnick added that the fuss is much ado about nothing: "I'm a boy scout - everyone knows that about me". Well, unfortunately, actions speak louder than do-gooder words.

Why would Zelnick's supporters from OppenheimerFunds, D. E. Shaw, and SAC Capital on the board, who had backed him last year, approve such a high pay package? Well, none of these shareholders is actually on the board. Instead, the board is made up of insiders Zelnick and Feder, plus two ex-BMG executives, a former William Morris executive, and two pre-Zelnick directors. In other words, by a 5 to 2 count, this is a Zelnick-friendly board.

Activist investors need to earn a return for their shareholders, but it should be done through their investments not through executive compensation on top of their investments. In this case, ZelnickMedia's actions appear self-serving even if they were somehow legitimate.

They are also being short-sighted. They gained the support and trust of several large and respected hedge funds and mutual funds in taking control of Take-Two. Even if the E.A. buyout goes through, and these investors pocket a gain on it, I would be surprised if they weren't reluctant to partner up again with ZelnickMedia after observing these pay increases.

This story also suggests investors who join an activist coalition need to examine who will be serving on the boards of companies after a new regime takes over. Understandably, many investors would rather not take on the time requirements and potential legal liabilities of serving on a public company board. Without proper oversight, however, problems like the ones in evidence at Take-Two can happen.