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Rumors About THQ Takeover May Be Right On

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An objective look at the video-game landscape.

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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 Mint.com, 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.
Positions in THQI and ATVI
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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