Why Sony Buying Take-Two Interactive Wouldn't Have Made Sense Anyway
Sony (NYSE: SNE) is one of the most successful video game companies in the world. Its PlayStation 4 family of game consoles has been immensely successful over the course of the current game console generation, with lifetime sales nearing 90 million units as of a recent tally: more than twice that of Microsoft's (NASDAQ: MSFT) Xbox One, its main rival.
Sony's success in the gaming market has been in large part influenced by the fact that the company's PlayStation platform is home to a large number of compelling exclusive titles. As Digital Trends puts it, "[The] list of PlayStation 4 exclusives puts its competitors to shame."
A scene from "Grand Theft Auto V." Image source: Take-Two Interactive.
Recently, there was some speculation that Sony -- perhaps in a bid to augment its already impressive set of PlayStation-exclusive titles -- planned to acquire game publisher Take-Two Interactive (NASDAQ: TTWO). Take-Two Interactive develops and publishes some very popular game franchises, including Red Dead and Grand Theft Auto.
A Sony representative, however, denied that speculation in a statement to Bloomberg. Here's why such a deal probably wouldn't have made much sense, anyway.
A steep price
Right now, Take-Two Interactive commands a market capitalization of about $10.6 billion. If Sony -- or any other company, for that matter -- wanted to scoop up the game publisher, it would have to pay a significant premium to the current price for the deal to make sense for Take-Two Interactive's shareholders.
Considering that Take-Two Interactive's 52-week high stands at $139.91 per share -- nearly 50% above the current share price -- I think that figure represents the minimum that a potential acquirer would have to shell out to get their hands on the game publisher. That would imply a purchase price close to $16 billion.
Sony could certainly pull off such a deal. After all, Sony is a cash-generating machine, bringing in nearly $11 billion in free cash flow over the last 12 months. And, on the surface, such a deal might make sense. Sony would gain ownership of Take-Two Interactive's intellectual property, and its big franchises presumably would become PlayStation-exclusive in future iterations. Having Grand Theft Auto VI and Red Dead Redemption 3 as PlayStation exclusives could further strengthen Sony's PlayStation ecosystem.
The problem I see, though, is that $16 billion would be a lot to pay for a few (admittedly highly popular) exclusives. As I mentioned earlier, Sony already has a range of exclusive titles that are clearly doing a good job helping it to fortify its share of the game console market.
Moreover, if Sony were to embark on a strategy of paying a lot to own popular game franchises, Microsoft -- with its substantially greater financial resources -- could very well follow suit. Microsoft could easily outbid Sony for Take-Two Interactive if necessary. Or, if it weren't willing to do that, Microsoft could buy another game publisher -- perhaps Activision Blizzard or Electronic Arts -- in response.
Those publishers also have valuable game franchises across a wide range of platforms and could allow Microsoft to negate the benefit that Sony would get from buying Take-Two Interactive. In that case, the video game market would become highly fragmented, damaging the industry as a whole.
Investor takeaway
Make no mistake: I think highly of Take-Two Interactive and of both the strength of the franchises that it owns as well as its rock-solid execution over the last several years.
However, I don't think it would make sense for Sony to shell out so much money just to get its hands on Take-Two Interactive's studios and intellectual property.
Sony's best bet is to continue to invest in its in-house game franchises. Sony should also work diligently to make sure that its hardware, as well as its exclusive titles, are compelling enough to give it a head start when the next round of game consoles launches from both vendors.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
