Stephen Frankola sends: “Electronic Arts today announced that while EA continues to have a high regard for Take-Two’s creative teams and products, after careful consideration, including a management presentation and review of other due diligence materials provided by Take-Two Interactive Software, EA has decided not to make a proposal to acquire Take-Two and has terminated discussions with Take-Two.

John Riccitiello, CEO of EA, said:

“EA is tracking toward a record breaking year. We’re launching 15 new games including award-winners like SPORE, Dead Space and Mirror’s Edge, great new titles from the Sims, new family titles with Hasbro, and the highest quality slate of EA SPORTS titles on this generation of consoles. We’re also expanding beyond our core business with a series of direct-to-consumer launches including Warhammer Online.”

(From Marketwatch.com)

First, I think that the tone that Electronic Arts (ERTS) used is noteworthy. Though the reaction tomorrow may still be negative for Take Two (TTWO) shares, ERTS said nothing to that effect in their statement. In fact, from my point of view, it was mildly positive - ERTS seemed to say, “We’re more focused on turning around our money-losing business right now than spending the appropriately-large amount of money on TTWO’s successful one.”

It will be interesting to see TTWO’s reaction tomorrow. Though I have a long bias, I must admit that an initial drop will likely occur. I’ll be buying if it does. TTWO is on track to make $2/share this year; no other company in the video game industry (and really very few companies besides integrated oil industry) tradess at a 10x P/E. TTWO has a steady stream of releases for the rest of the year, the holiday season, and beyond.

Though I initially and continually touted a possible merger, I recognized that value may be better maximized when ERTS stops capping TTWO shares with the $25 merger ceiling. Therefore, I think that going forward - whether at 3:30 tomorrow, this Friday, or next April - TTWO shares should be trading at a higher price than they were at Friday’s close.

It looks like my calls may expire worthless, but it was a gamble that I don’t regret taking. The earnings TTWO reported about ten days ago were unbelievable, and the street could have, under other circumstances, applauded loudly. Observing the ERTS’ Take Two tango was certainly a good experience for this young, often-speculative investor to experience.

I’ll be sure to disclose any new position I take if conditions are ripe enough tomorrow morning.

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Below is the response that TTWO released after ERTS announced that they are done with merger talks.

Strauss Zelnick, Chairman of the Board of Take-Two, commented:

“We remain focused on creating value for our stockholders and our consumers. This has been our goal since EA launched its conditional and unsolicited bid six months ago, a bid which was repeatedly rejected by our stockholders. As part of that commitment, we remain actively engaged in discussions with other parties in the context of our formal process to consider strategic alternatives. We’re especially proud of the success we’ve enjoyed over the past eighteen months and we remain confident in our ability to generate value for stockholders.”

Ben Feder, Chief Executive Officer of Take-Two:

“Take-Two’s business has continued to strengthen since the time EA first made its offer. We have delivered terrific products to our consumers and we’ve been rewarded with very strong financial performance. We have an exciting future ahead of us, powered by our profitability, a significant cash position, the absence of debt, an undrawn credit facility and a terrific lineup of games. We are confident in the unique value of our business given our strong position in what is a growing and dynamic industry.”

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