Take-Two investors plan board takeover

SAN FRANCISCO/NEW YORK (Reuters) - Investors who own nearly half of Take-Two Interactive Software Inc. (TTWO.O) said they would seek to control its board and oust its chief executive, pushing up shares in the maker of the “Grand Theft Auto” video game.

Take-Two management has been under fire for years over issues from overstated revenue to illegally backdated stock options.

The company regularly failed to make financial targets and spawned a national controversy due to undisclosed sexual content in one of its hit games.

“Replacing the board is a good thing. I think it’s very healthy to flush everybody,” said Wedbush Morgan analyst Michael Pachter, who has a “sell” rating on Take-Two shares.

“They completely abdicated any responsibility for the oversight of the options-granting policy. A more responsible board would have committed hari-kari,” he said.

The shareholder group together holds 46 percent of Take-Two and includes OppenheimerFunds Inc., S.A.C. Capital Management, Tudor Investment Corp., D.E. Shaw Valence Portfolios and ZelnickMedia Corp.

The group will seek the appointment of Strauss Zelnick, a former CEO of BMG Entertainment, as nonexecutive chairman, and he will seek the power to replace Chief Executive Paul Eibeler and review the employment status of Chief Financial Officer Karl Winters, according to a filing with the U.S. Securities and Exchange Commission.

A Take-Two spokesman said in a release on Wednesday the company was “pleased that investors recognize the value” in Take-Two but did not comment specifically on the group’s plans.

While Take-Two has wowed gamers with its controversial urban action game series “Grand Theft Auto,” it has worried many investors due to its financial and management missteps.

“Given Take-Two’s history of inconsistent performance and execution, we would view the proposed management change (which we believe is likely) as a positive for the company, assuming key development personnel are retained,” JP Morgan analyst Dean Gianoukos said in a research note.

OPTIONS SCANDAL

A scandal over backdating of stock options engulfed Take-Two last year as it was starting to recover from a controversy over undisclosed sexually explicit content in its blockbuster “Grand Theft Auto: San Andreas” game.

Former Take-Two CEO Ryan Brant in February pleaded guilty to criminal charges related to backdating stock options and also settled a civil action brought by the SEC, paying a total of $7.3 million to close the cases.

Following the settlement, five independent directors who received improperly dated stock options agreed to repay the company hundreds of thousands of dollars.

In June 2005, Brant and three other top executives paid $14 million to settle an SEC lawsuit alleging fraudulent accounting practices.

The shareholder group said it would nominate a slate of six directors to Take-Two’s board, including Zelnick, Benjamin Feder, Jon J. Moses, Michael Dornemann, and Michael James Sheresky. The sixth person may be Grover Brown or John Levy, who are current independent directors of Take-Two.

The group said it will also vote to reduce the size of the board to six members from nine, which means its nominees would constitute the entire board. It also plans to seek Zelnick’s appointment as nonexecutive chairman. Zelnick intends to ask the board to delegate to him the power to replace Eibeler.

Take-Two’s annual stockholders meeting is scheduled for March 23.

Take-Two shares closed up 7.6 percent at $18.95 after earlier reaching a high of $20.88 in early Nasdaq trade.

Some analysts, however, were wary about whether Take-Two can make a quick recovery after a management change. Last week, the company posted a net loss of $14 million for its fiscal fourth quarter on charges related to stock options.

Arvind Bhatia, director of research at Sterne, Agee & Leach, said, “Outside management can play a role, but I just think it will take time. The company’s problems can’t be corrected overnight.”

Bhatia, who restated his “sell” rating on the stock, said one major concern is that Take-Two is still a “one-product company.”

“They need someone who’s tough enough and smart enough to make the tough decisions and someone who is soft enough to coddle the creative people,” Wedbush’s Pachter said.