Tuesday, March 13, 2007

Grand Theft Takeover

A group of shareholders is hard on the trail of Take Two Interactive’s executive officers for alleged corporate “grand theft through mismanagement.” This is not unusual as shareholder activism is on the rise. Tactics have gone well beyond the class action lawsuit that serves to punish companies and compensate investors for corporate transgressions.

Institutional investors, especially feisty, high-profile moguls like Carl Icahn and brash, youthful hedge fund managers, are using other methods to advance their own agendas. There is something about sitting on a pile of assets under management that give money managers inordinate confidence in their own operational acumen. One approach is to take a significant position in a company at any price and then begin writing letters to management and the board of directors asking for change “in the interests of all shareholders.” If their ideas are rejected as is usually the case, the fund begins issuing press releases and appealing to the rest of the shareholder base to join in.

The situation with
Take Two Interactive, Inc. (TTWO: Nasdaq) caught my attention because some of the most conservative investor groups have joined in campaign. Oppenheimer Funds, DE Shaw Valence Fund, Tudor Investment Group and SAC Capital Management have reached the publicity stage in their campaign. They announced a plan to nominate their own slate directors at the next annual meeting.

They also want to replace the CEO,
Paul Eibeler, who they claim has mismanaged the company, with Strauss Zelnick of Zelnick Media. Zelnick is an entertainment industry icon, having led BMG Entertainment and 20th Century Fox. He may not know a thing about video games, but he certainly knows corporate politics.

Take Two has had other problems. Its chairman and founder,
Ryan Brant, was the first executive to be found guilty of stock option backdating. The company’s premier product, video game Grand Theft Auto, is thought to contain pornographic images. Sales declined in 2006 and the company recorded its first loss in several years.

Wall Street responded warmly to the shareholder action and TTWO share price rose sharply in the first day of trading following the group’s press announcement and SEC filing. The annual meeting is scheduled for March 23rd. If this particular group is successful in gaining control of the board of directors, we expect the action to inspire more aggressive actions against other companies with flagging performance.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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