Take-Two and Electronic Arts: To Merge or Not To Merge?

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 |  Includes: EA, TTWO
by: Matthew Rafat

Take-Two Interactive (NASDAQ:TTWO) closed at 21.77 yesterday (September 9, 2008), far below EA's earlier offered price of 25.74. The DOJ's anti-trust division already blessed a merger, so the only question is whether the two parties will actually want to complete a deal.

With Electronic Art's (ERTS) share price near a 52 week low, a deal may be difficult. Most deals this size require the target to accept an all-stock or partial-stock deal from the acquirer. ERTS does have about two billion dollars in cash, so it can do an all-cash deal if it chooses; however, its shareholders would howl worse than Allen Ginsburg ("I saw the best trades of my generation destroyed by a mad CEO, starving hysterical naked..."). Already, short sellers are taking positions in ERTS stock, dragging it farther down.

I bought 1000 shares of TTWO yesterday, but I am not absolutely sure the risk/reward ratio is still in favor of a long-term TTWO hold. I plan on flipping my shares this week or next week. If I was planning on holding onto my TTWO shares, I would buy puts to be safe. The current option pricing indicates traders expect the stock to fluctuate between 20 and 25 dollars, or 20 and 27.50 dollars. The latest options expire on September 19, 2008, so expect significant volatility over the next ten days.

Disclosure: Long TTWO