Take-Two Activists Give Game a Bad Name

The Take-Two Interactive(TTWO Quote) saga continues, with Electronic Arts(ERTS Quote) having gone hostile with its previous $26 a share offer for the company that was made public on Feb. 24. The EA offer represented a 50% premium for Take-Two's shareholders. Yet, Take-Two's board and management team rejected the offer as "too low," especially in light of the pending April release of the next installment of their Grand Theft Auto video game franchise.

Take-Two has a history of a lurching stock price and financial and legal scandals.

Last year, it culminated in a sizable number of Take-Two shareholders openly revolting and seizing control of the company.

Back then, the video game publisher couldn't get its act together. The stock's price had dropped by 50% in the summer of 2006, going to $10 after financial and legal problems surfaced. Its founder admitted to backdating stock options, and discussions of a possible buyout with EA, which hadn't been publicly disclosed until a couple of weeks ago, fizzled.

Shareholders were understandably upset. And, in a remarkable moment of collective exasperation, several well-respected hedge funds and institutional investors banded together behind ZelnickMedia -- a "group of experienced executives who provide management expertise" according to its website -- to oust Take-Two's former management team and much of its board.

ZelnickMedia is not well-known for activist boardroom coups. Led by Strauss Zelnick, a formerly successful media executive at BMG Entertainment and 20th Century Fox, with offices in Santa Monica and New York, they won over the support of D. E. Shaw (9% holders in the company), SAC Capital (7.8% holders), Tudor Investment Corp., and even traditionally passive mutual fund company OppenheimerFunds Inc. (the largest Take-Two shareholder at the time at 24.5%) to say changing the status quo is much better than keeping faith in a management team and board which hadn't delivered for shareholders.

ZelnickMedia sold themselves to their supporters at the time as "corporate turnaround specialists." However, Strauss Zelnick soon admitted after he took control of the company that this turnaround assignment was ''the biggest thing we've done". The firm's previous wins were in selling the marketing rights of Time-Life to Reader's Digest for $91.8 million and selling the money-losing needlepoint cataloger Lillian Vernon -- two companies operating in industries an order of magnitude slower than Take-Two's.

Zelnick himself took on the Chairman role, with his colleagues Ben Feder as CEO and Karl Slatoff as EVP. For filling these three roles, the new board approved a pay package paying Zelnick Media $62,500 as a monthly management fee (or $250,000 per executive per annum, if you assume the three were paid equally although such a sum would be high for a Chairman). On top of this, ZelnickMedia had the opportunity to receive an annual bonus of $750,000 and buy a block of shares.

Yet, despite making executive changes, ordering new business plans for the different organizational units and holding town-hall meetings at which employees asked their new leaders whether they knew anything about the video games Take-Two made, ZelnickMedia has not been successful in repositioning Take-Two in the year since its ascension.