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Rumors About THQ Takeover May Be Right On


An objective look at the video-game landscape.

I usually ignore takeover rumors because 99.9% of the time, they're 100% false. However, I'm giving some credence to today's gossip -- that video-game software publisher THQ (THQI) is being looked at as a target for media companies, including Electronic Arts (ERTS), Time Warner (TWX), and News Corp. (NWS). The stock is up sharply on heavy volume, and options-traders are busy scooping up calls.

As a THQ shareholder, I'm obviously biased in favor of a deal. But just take an objective look at the video-game industry landscape, and you'll see that the rumor-mongers just might be on the money, with EA playing the part of buyer.

EA's flagship sports game business is clearly in trouble. Despite stellar reviews, Madden NFL 2009 failed to excite consumers and thus suffered a unit sales decline from last year's edition. And if a critically-acclaimed Madden game can't move units, how well can NHL 10 and FIFA Soccer 10 possibly do in a holiday season chock-full of megahits like Activision's (ATVI) Call of Duty: Modern Warfare 2, and Microsoft's (MSFT) Halo 3: ODST?

EA clearly needs a new sports hit, and THQ's hugely successful Ultimate Fighting Championship franchise would fit that role to a T. 2010's competing EA Sports MMA game will face an uphill battle in generating big sales numbers, simply because it doesn't have a well-known brand like UFC to attach to it. EA could fix that problem by using some of its cash hoard on buying THQ.

Now is the perfect time for EA to do this deal. Even with THQ more than tripling off its March lows, it's trading at just 0.4 time sales. That's an absurdly low multiple that doesn't reflect the value of THQ's other licensed properties like WWE (WWE) wrestling, and owned properties like Saint's Row and Company of Heroes.

We're also in a broader economic landscape that's ripe for deal-making: a rising stock market, low interest rates, and cash-rich balance sheets. We just saw Intuit (INTU) buy, and Dell (DELL) take down Perot Systems (PER) following several other deal announcements earlier in the month. EA-THQ just might be next.

For more on this sector, see Steve Smith's How to Play Video Game Stocks.
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Positions in THQI and ATVI
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