The Takeover of Take-Two: The Company and Its Problems

We are doing a series of posts on Take-Two Interactive, a company that saw insurgents gain control of the board of directors through an unorthodox approach.  For the initial post, go here. 

Today, we provide some background on the company.  It is safe to say that Take-Two Interactive has been a company in turmoil.

Founded in 1993, Take-Two Interactive Software went public in 1997. Initially listed on Nasdaq as a smallcap company, Take-Two sold games made for computers and consoles. The Company had moderate success, generating sales of approximately $300 million in the fiscal year ending Oct. 31, 1999.

Things changed in late 2001 with the introduction of Grand Theft Auto III. A qualitative improvement over prior versions, the game became “the defining title” for the Sony Playstation 2, selling more than 8 million copies. The follow up, Grand Theft Vice City likewise sold well. Take-Two sales climbed to almost $1 billion; share prices went from single digits to around $40.

With success, however, came problems. For one thing, the signature game Grand Theft came under increasing attack for the violent content and unsavory dialogue. In 2005, it was revealed that Grand Theft Auto: San Andreas Fault contained a hidden module with an X rated game (called the “Hot Coffee” incident because the actions started with an invitation for a cup of coffee), causing the game to be rerated adults only and hurt earnings as a result of returned games.

Nor were these the only problems. In February 2002, the company restated its financial statements for seven quarters. Three years later, the company settled a case with the Securities and Exchange Commission (see Exchange Act Release No. 51809) involving the payment of $8.75 in penalties and over $5.1 million in disgorgement and prejudgment interest. Described as a “massive financial fraud,” the SEC alleged that the company “systematically recognized sales revenue from approximately 180 ‘parking’ transactions in which the company, at or near the end of fiscal quarters or year end, shipped hundreds of thousands of video games to distributors who had no obligation to pay for the product, fraudulently recorded the shipments as if they were sales, and then accepted return of the games in subsequent reporting periods.” The SEC complaint is here.

In addition to a spate of law suits over these problems, Take-Two found itself embroiled in a backdating scandal. The Commission announced a settlement of the backdating case in February 2007 against the company’s founder and former CEO. For the release, go here.  For the actual complaint, go here.  Ryan Brant agreed to a settlement involving the payment of over $6 million in penalties, disgorgement and prejudgment interest. The release disclosed the following:

• The Complaint alleges that from 1997 through September 2003, Brant, with the participation and knowledge of senior executives and others at Take-Two, looked back and picked grant dates for the Company's incentive stock options that coincided with dates of historically low annual and quarterly closing prices for Take-Two's common stock, resulting in grants of "in-the-money" options. Brant and others at Take-Two referred to this practice as "pick-a-date" option granting. According to the Complaint, Brant granted options to himself and others at Take-Two without complying with Take Two's stock option plans and, in virtually all instances, without the Board or a Committee thereof approving the grant dates or exercise prices.

• The Complaint alleges that at Brant's direction, Take-Two officers and employees prepared documents falsely indicating that the option grants had been made on earlier dates when Take-Two's stock price had closed lower. From 1997 to September 2003, Brant awarded himself ten backdated option grants, representing a total of approximately 2.1 million shares of Take Two common stock. Brant exercised all those options before resigning from Take Two on October 16, 2006.

Brant also pled guilty to a criminal felony count. Nor was this necessarily the end. The Commission noted, rather ominously for Take-Two, that the “investigation is continuing.”

Where does this leave the company financially? It lost nearly $185 million in fiscal 2006. It currently has few top selling video console games and only one (Elder Scrolls IV: Oblivion) top ten computer game.  It will issue Grand Theft Auto IV sometime in the Fall.  In other words, the company looked ripe for a change in management.