In its pursuit of
biggest challenge won't be convincing a skeptical board.
Instead EA's toughest assignment will be to keep Sam and Dan Houser, the creative geniuses behind Take-Two's biggest franchise,
Grand Theft Auto
, from leaving after the deal is done. It also has to make sure the key talent at Rockstar Games, the development studio of Take-Two and the label founded by the Houser brothers, stay put.
It's a larger problem than EA would like to admit. The video-games industry is littered with examples of development studios where developers and co-founders have walked out after an acquisition.
And some industry watchers say, at this point, the Houser brothers are a flight risk.
"The chances that they will leave are very good," says Shane Satterfield, editor-in-chief of GameTrailers, part of
MTV Networks. "I think they are very free spirited guys."
Culturally, Rockstar Games and EA couldn't be more apart. For instance, it is unlikely that EA will ever release a game such as
, the latest offering from Rockstar. British regulators criticized
for its excessively violent content and
denied a rating -- a step that barred the release the game in the UK.
And there's EA's past to consider. The company has gained a reputation for killing the independent spirit of the studios it has acquired. Under EA CEO John Riccitiello's leadership that has changed, insiders say, but fears that EA's corporate culture could interfere with developer freedom persist.
There's also the question of how much it will cost to keep Rockstar's management on board. Analysts are concerned the costs could be so high that it could affect the studio's profitability.
EA cannot afford to lose the Housers, the crown jewels at Take-Two. "Rockstar is Take-Two," says Satterfield. "They are the ones behind Take-Two biggest hits, the
Grand Theft Auto
Because of its hostile bid, Riccitiello told analysts EA has not been able to speak to key employees of Rockstar, but hopes they will stay, if the merger goes through.
"This is an organization and leadership team that has survived six CEO transitions in the last five years, so under any circumstance, they (Rockstar) have staying power and they are resilient," said Riccitiello.
Rockstar's ability to be completely autonomous may have something to do with that, industry watchers say.
The label was founded in 1998 by Sam Houser, his brother Dan, Sam's friend Terry Donovan and Jamie King.
The Housers and King worked in the video games publishing division of
and moved when BMG was sold to Take Two in 1998. Along the way, they acquired DMA Design, a Scottish video games developer now called Rockstar North, which has since contributed to the
Grand Theft Auto
"The Houser brothers run Rockstar like a small business," says Satterfield. "They are quite involved in the creative side of the games and they manage their staff closely."
The brothers also run their business differently. Unlike the rest of the games industry, Rockstar doesn't show its games to the press or analysts until a few weeks before their release.
The reclusive Housers almost never speak at conferences, attend trade shows or interview with video-games journalists.
"I have been in the industry for a decade and I have never seen them anywhere," says Satterfield. It's in stark contrast to EA studio heads and creative teams, who interact closely with the games industry.
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,
paid about $375 million for Rare, a studio with an outsized reputation for churning out hits such as
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.