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Take-Two Brass Flagged for Delay of Game

The delay of <I>Grand Theft Auto IV</I> doesn't speak well of the game maker's new management.

Video-game publisher

Take-Two's

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new management has stumbled badly.

Thursday's announcement to

delay the company's biggest game of the year,

Grand Theft Auto IV

, in addition to the

rating problems around another title,

Manhunt 2

and ongoing inefficiency in the way it develops games has dampened investor optimism over the new team.

In March, when Take-Two's

largest shareholders ousted the company's CEO, Paul Eibeler, and the board of directors, shares soared more than 15%, touching a high of $24.80.

The new team, which comprised

Chairman Strauss Zelnick, CEO Ben Feder and a revamped board of directors, inspired shareholder hoped for a turnaround at a company plagued by scandals and accounting-related problems.

But those problems run deep, and though five months of new executives at the helm may be too soon to judge, so far, there's been no meaningful change or value for shareholders. Take-Two shares, trading nearly 45% off their 52-week high, plunged 16.3% to $14.16 Friday.

Though Take-Two's recent fall could be viewed as a buying opportunity, the bigger question is whether the company can deliver consistently and on schedule. As of now, that's a no.

The pushback of

Grand Theft Auto IV's

release from October to April 2008 took the wind out of Take-Two's guidance for the fourth quarter and fiscal year 2007.

For the fourth quarter, Take-Two forecast revenue in the range of $275 million to $300 million, way below analysts' forecast of $535.2 million in sales.

Revenue for the full year ending Oct. 31, is now expected to be the range of $950 million to $1billion with an EPS loss in the range of $1.25 to $1.35. Analysts were expecting revenue of $1.22 billion and EPS loss of 30 cents.

Competitors including

Electronic Arts

>

(ERTS)

and

Activision

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will likely benefit from consumer dollars soon shifting in their favor.

Shares of EA closed Friday off 3%, to $50.04; Activision added 3%, to $18.84.

The delay, a disappointment to investors who were counting on change at the company, is unlikely to convince skeptics to sign on to Take-Two.

"I have avoided Take-Two because the company has been in turmoil some time now," and even with new management, "it doesn't seem like some of big problems around the company are being fixed," says Dan Ahrens, portfolio manager with the Ladenburg Thalmann Gaming and Casino Mutual Fund, which does not own shares of Take-Two, but has a position in competitors EA and Activision.

Stealing the Show

Ahrens says Take-Two is excessively reliant on the

Grand Theft Auto

franchise, and the news of the delay should serve as a red flag to investors who might have wanted to bet on it.

"This is a major snafu on Take-Two's part," Kauffman Bros analyst Todd Mitchell said in a report. "We think it is going to alienate some fans as well as their investors." Kauffman makes a market in Take-Two.

While acknowledging that the game has posed technical challenges during development leading to its delay, Take-Two's Zelnick has tried to spin the decision to delay the product as one where the company would rather ship a product late than ship a less-than-stellar version.

The chairman's words, however, raise questions about whether the new bosses are on top of the company's development schedule.

"This announcement just weeks after the company's midquarter conference call, where management confirmed the title would be released on time, is an indication that visibility remains clouded both outside and within the company," Piper Jaffray analyst Anthony Gikas writes in a report. Piper Jaffray makes a market in Take-Two shares.

It is also unclear if Take-Two's new management has been able to reign in the creative team at Rockstar Games, the development division of the company responsible for its biggest blockbusters.

With the yet-to-be released

Manhunt 2

, Take-Two's management seems hesitant to make needed, tough decisions.

Manhunt 2

was

denied a rating by British certification authorities for its violent content and offered an "Adults Only" rating in the U.S., effectively limiting its retail sales. Take-Two has appealed the British ruling. At the same time, it has taken the game off its slate for fiscal 2008.

Zelnick and CEO Feder have yet to say if they will rework the game to make it more palatable for commercial release.

Scrubbing

Manhunt 2

for a quicker release could lead Take-Two's management into a confrontation with its Rockstar Games division, a move that the company needs to make to better balance its promises to shareholders vs. the creative freedom the Rockstar team demands.

Meanwhile, analysts are also unhappy with

the sparse results from the company's much-vaunted, 100-day plan to revitalize and restructure its business. Take-Two is yet to offer any updates on its attempts to sell its ancillary units.

The eventual release of

Grand Theft Auto IV

and

Manhunt 2

may very well prove to be blockbusters, but investors will need to patient and willing to pay the price for the company's missteps until then.