Take Two (TTWO) Interactive, a company with a major video game sports division, received a buyout offer last year from video game sports giant Electronic Arts (ERTS) before the market storm. Today, there is a rumor that THQ (THQI), whose list of internal intellectual property is small and comparatively unimpressive in terms of sales volume, is receiving buyout interest upwards near Take Two's current market capitalization. Among THQ's heavy hitters are Red Faction, Darksiders and Saints Row, hardly equivalent to Grand Theft Auto, Civilization, Bioshock and a long list of Take Two internal brand names. THQ makes the majority of their earnings from licenses from companies such as Nickelodeon, WWE and UFC. In the latter case of WWE and UFC, THQ only owns a small part of the Japanese developer who creates UFC and WWE products.
It is being reported today that dealReporter is spreading a vague rumor that THQ is a buyout target from a list of companies and that there is even a specific price of $10-$13 being thrown around. dealReporter ought to be held accountable for this rumor. If it comes to pass, how would they have known? But if it doesn’t - which is more likely – the market should memorize the name of an outfit that helps spike up a stock on a false idea.
Why be so skeptical? Because THQ management has not impressed anybody in recent years and the stock hit a 52 week low of $2.23 for a reason. A potential acquirer would be primarily buying in order to acquire a strong management and business model. Beyond a struggling management and an outdated business model reliant on licenses, there is not much else to acquire. Certainly, a rival could always just outbid for THQ’s licenses and buy a group of similar private developers at less than one quarter the cost of the proposed buyout market capitalization. What makes a publisher like Take Two Interactive unique is their list of internal intellectual property. THQ does not offer a list of IP that guarantees earnings for anyone and they have struggled to hold onto their licenses of a company like Disney, which has risen up to compete as a publisher themselves, avoiding established publishers like THQ.
A media conglomerate that is willing to spend upwards to 900 million dollars can create a powerhouse publisher for less than a third of that cost. Disney has done it in recent years and Warner Brothers Interactive is the latest to rise up out of nowhere. They acquired struggling private developers for nearly nothing, slapped on their own brand names and learned how to go to market as a publisher by collecting former industry executives. They certainly did not need to spend 700-900 million dollars in order to do that, which makes this rumor highly suspect. THQ has value for a speculative investor, but not the same value for a potential acquirer. The video game space has for years received an unusual amount of buyout rumors and it's time we start paying closer attention to who is spreading those rumors.
Disclosure: author has opened a short position in THQ
