Take-Two’s Mr. Fix-It Inherits a Handful
April, 11 2007
The New York Times, 04.11.07
The closest Strauss Zelnick usually gets to playing video games is watching over the shoulders of his two young sons. Mr. Zelnick concedes that his gaming skills are better suited for Pong and Pac-Man than Grand Theft Auto, the smash hit from the company that he is now in charge of turning around.
But when the stock price of Take-Two Interactive Software slipped under $10 last summer as inquiries into its business practices began to mount, Mr. Zelnick, a veteran of the movie and music industries, saw a potential bargain for his investment firm.
He and his partners at ZelnickMedia first weighed taking the company private, but decided that would be too complicated. So instead, Mr. Zelnick started approaching Take-Two's largest shareholders one by one to sell them on his plan to take over the board.
His efforts culminated two weeks ago at Take-Two's annual shareholder meeting in New York, when all but two board members were removed. Two hours after the meeting adjourned, the company announced that its new board had elected Mr. Zelnick as chairman and appointed one of his close deputies as chief executive.
''We hit the ground running,'' Mr. Zelnick said in an interview yesterday over breakfast in Midtown Manhattan. ''We have to clean the company up, and then operate in a pristine manner going forward.''
Mr. Zelnick has taken on risky corporate overhauls in the past, but none have been as complex as the turnaround of Take-Two, which he called ''the biggest thing we've done.''
Beyond the issue of whether the company can reverse its uneven sales and become more than a one-hit wonder, there are the legal problems, which seem to grow more serious by the day.
Last week, the Securities and Exchange Commission said it had upgraded its inquiry into the backdating of stock options at Take-Two from an informal probe to a full-fledged investigation. Separately, the Manhattan district attorney and the Internal Revenue Service are conducting their own investigations of the company.
Whether Take-Two is salvageable, technology analysts said, depends on how deep its problems run. Can the company be fixed with fresh management and a new corporate culture? Or are its problems too systemic and ingrained to repair?
''Will it be easy? No,'' said Daniel Ernst, an analyst with Soleil Securities in New York. ''They've got one phenomenally well-known franchise, and a decent position in the market from which to grow that. So I think there's a decent opportunity here.''
While Take-Two has never had trouble selling its notoriously violent Grand Theft Auto series, which will go on sale in its fourth incarnation in October, other games have not done as well.
That means that a single game in the Grand Theft Auto series has at times made up more than half of the company's sales, even though it has dozens of titles. For example, for the first three months after the newest Grand Theft Auto game went on sale in 2004, it accounted for 57 percent of Take-Two's total sales of $502 million for that period, according to Janco Partners, an investment banking firm in Denver.
Shares of Take-Two rose steadily for much of March, after it became known that shareholders were plotting a revolt. The stock peaked at $23.79 before falling back, closing yesterday at $20.38.
So what does a former movie executive turned music executive turned investor know about turning around a video-game business? Some of Mr. Zelnick's new employees are asking that very question.
In his new role as chairman, Mr. Zelnick has held town hall meetings with Take-Two's staff. At one of those meetings in the company's Los Angeles office, an employee asked Mr. Zelnick whether he understood the types of games Take-Two makes.
That kind of candor does not rattle Mr. Zelnick. ''There's no consequence for saying what's on your mind, negative or positive,'' he said. If there are aspects of Take-Two's business that he does not fully understand, Mr. Zelnick said he is comfortable delegating authority.
''What I do in a situation where I'm uncomfortable because I don't have knowledge or experience is I find experts quickly,'' he said.
After he stepped down as the head of 20th Century Fox in 1993 -- a position he had held for four years, starting at the precocious age of 32 -- Mr. Zelnick became chief executive of Crystal Dynamics, a video game start-up. But he left after a little more than a year to become president and chief executive of BMG Entertainment's North American division in 1994.
Part of his success there was in reducing costs. He cut jobs at money-losing labels, and at the company's faltering record club he doubled profits within a year.
He said he planned to take a similarly active approach to Take-Two. He has already ordered up business plans from all Take-Two division heads. On Monday, the chief financial officer, Karl H. Winters, resigned; he was a holdover from the tenure of Take-Two's ousted chief executive, Paul Eibeler.
Within 100 days, Mr. Zelnick said he hoped to have a permanent chief executive in place -- Benjamin Feder, a ZelnickMedia partner, is currently filling the role -- and a cost-cutting plan to present to investors.
Analysts said Take-Two's problems were not necessarily insurmountable. ''They have arguably the best video game in the industry,'' said Mike Hickey, an analyst with Janco. ''Yet they have an interesting dislocation between incredible product and operating performance.
''When you see that dislocation, normally you'd find that attributable to management. With some fresh eyes, I think they could have a definite benefit.''
Mr. Zelnick formed ZelnickMedia with three partners in 2001 after leaving BMG, in part because he disagreed with its parent company about entering into an agreement with the file-sharing service Napster. There he had success with other corporate overhauls.
One of its first big projects, the publisher Time-Life, was losing money when ZelnickMedia bought the rights to market Time-Life products in 2003. The firm said it paid a ''very low'' price for the marketing rights. The firm sold a profitable Time-Life to Reader's Digest last month for $91.8 million.
On the other hand, another ZelnickMedia acquisition, the catalog retailer Lillian Vernon, was still losing money when the firm sold it last year. Of course, Time-Life, known for its commemorative photo albums and music compilations, and Lillian Vernon, a seller of needlepoint pillows and rattan baskets, are quite different from a video-game company that likes to push the boundaries, as Mr. Zelnick acknowledges.
''Take-Two is bigger, and in certain ways more complex,'' he said. ''On the other hand, Take-Two has no debt. It has a material amount of cash.''
He added, ''And the No. 1 franchise in the video-game business.''