Electronic Arts Inc. (EA) Should Try to Buy Take-Two Interactive Software, Inc. (TTWO) Again

EA would have probably milked sleeper Take-Two hits including BioShock and Red Dead Redemption into being even bigger successes.

Are you still sure that Take-Two is the one smarting these days?

It’s not. The year that Grand Theft Auto IV came out, Take-Two went on to record an adjusted profit of $2.08 a share on $1.6 billion in revenue. This year, analysts see a profit of $2.34 a share on $1.9 billion in revenue. EA generated $4.1 billion in adjusted revenue the year the game came out. This year — despite some pretty expensive casual and social gaming acquisitions to pad organic growth over the years — Wall Street sees just $4 billion in revenue.

It should also be pointed out that analysts expect EA to earn just $1.20 a share this year. In other words, it can pay a huge premium for Take-Two and it would still be accretive to EA’s bottom line.

The caveat here, of course, is that Take-Two’s results have always been lumpy. They peak during Grand Theft Auto releases. The same pros that see record results at Take-Two this fiscal year are targeting just $1.08 a share in earnings and $1.4 billion in revenue next year.

However, wasn’t the point of EA trying to buy Take-Two ahead of the last major Grand Theft Auto installment that it could put its larger development resources to work at putting out more timely releases? Wouldn’t buying Take-Two make EA larger than Activision Blizzard, Inc. (NASDAQ:ATVI)?

It won’t happen. The EA CEO who oversaw the failed acquisition resigned earlier this year. It would have to take a new commitment to make it happen.

However, the combination makes more sense now than it did five years ago for both companies.

EA needs the growth, as analysts are only targeting top-line growth in the mid-single digits over the next two years. The last thing it would want is for Activision Blizzard — another company that could be even hungrier for growth with a projected top-line decline this year as World of Warcraft players move on — make a move on its former flame. Take-Two could also use an exit strategy, lest we have to wait another five years for Grand Theft Auto VI.

Again, it won’t happen — but it should.

The article EA Should Try to Buy Take-Two Again originally appeared on Fool.com is written by Rick Munarriz.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Take-Two Interactive. It recommends and owns shares of Activision Blizzard.

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